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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------------
Commission file number 0-29574
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ALTAREX CORP.
(Exact name of Registrant as specified in its charter)
Province of Alberta, Canada
(Jurisdiction of incorporation or organization)
Campus Tower, Suite 300, 8625 - 112 Street,
Edmonton, Alberta, Canada, T6G 1K8 (Address
of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None
- --------------------------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
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Number of outstanding shares of each of the Company's classes of capital or
common stock as of May 1, 1998: 16,502,613 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
--- ---
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
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TABLE OF CONTENTS
PART I ........................................................................1
ITEM 1 - DESCRIPTION OF THE BUSINESS....................................1
The Company......................................................1
History..........................................................2
Plan of Operation................................................2
Cancer and Concurrent Therapies..................................3
Immunological Therapeutic Approach...............................6
AltaRex's Anti-Idiotype Induction Therapy........................8
Business of the Company..........................................8
The Company's Products..........................................10
Strategic Alliances and License Agreements......................15
Manufacturing...................................................17
Human Resources.................................................17
Regulatory Requirements.........................................18
Competition.....................................................20
Proprietary Protection..........................................21
Medical and Scientific Advisory Board...........................23
Risk Factors....................................................25
ITEM 2 - DESCRIPTION OF PROPERTY.......................................33
ITEM 3 - LEGAL PROCEEDINGS.............................................34
ITEM 4 - CONTROL OF REGISTRANT.........................................34
ITEM 5 - NATURE OF TRADING MARKET......................................35
ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS................................36
ITEM 7 - TAXATION......................................................38
ITEM 8 - SELECTED FINANCIAL DATA.......................................46
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................48
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT.........................53
ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS.......................55
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM..........................58
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS...............59
PART III......................................................................59
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES..............................59
ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN
SECURITY FOR REGISTERED SECURITIES........................59
PART IV.......................................................................60
ITEM 17 - FINANCIAL STATEMENTS.........................................60
ITEM 18 - FINANCIAL STATEMENTS.........................................60
ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS............................60
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Note Regarding Forward Looking Statements
Certain statements in this document constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the Company's dependence on licensed technology; the Company's history of
operating losses and uncertainty of future profitability; uncertainty of access
to capital; the Company's dependence on strategic partners and key personnel;
uncertainty of the regulatory approval for the company's products; competition
and the risk associated with new products. See "Item 1. Description of the
Business - Risk Factors."
Exchange Rate Information
In this Registration Statement, unless otherwise specified, all monetary amounts
are expressed in Canadian dollars ("$" or "cdn. $"). The following table sets
out the exchange rates, based on the noon buying rates in New York City for
cable transfers in foreign currencies as certified for customs purposes by The
Federal Reserve Bank of New York, for the conversion of Canadian dollars into
United States dollars in effect at the end of the following periods, and the
average exchange rates (based on the average of the exchange rates on the last
day of each month in such periods) and the range of high and low exchange rates
for such periods.
<TABLE>
<CAPTION>
U.S. Dollars Per Canadian Dollar
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
End of Period .6988 .7301 .7323 .7128 .7544
High for the period .7484 .7513 .7527 .7632 .8046
Low for the period .6951 .7235 .7023 .7103 .7439
Average for the period .7224 .7329 .7305 .7300 .7729
</TABLE>
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The information set forth in this Registration Statement is as at December 31,
1997 unless an earlier or later date is indicated. On May 1, 1998, the noon rate
of exchange, as reported by the Federal Reserve Bank of New York for the
conversion of United States dollars into Canadian dollars, as U.S. $.6993 (U.S.
$1.00 = Cdn. $1.4340).
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GLOSSARY OF TERMS
Adjuvant: A substance that enhances the immune response to
an antigen with which it is combined.
Amino Acids: The basic molecules that form proteins.
Antibody: A protein agent developed in response to, and
binding specifically with, an antigen.
Anti-idiotype induction: The in vivo induction of
an immune response that produces
antigen mimics by the injection of
an antibody in the human body.
Antigen: A substance which elicits a specific immune
response.
Anti-MUC-1: An antibody or protein molecule that
recognizes that cancer associated
mucinous antigen known as MUC-1.
Cellular response: An immune system response
mediated by antigen specific immune
cells, often cytotoxic cells.
cGMP - current Good Government promulgated guidelines governing the
Manufacturing Practices: manufacture of human and animal drugs and
biologicals.
Chemotherapy or Generally, the use of drugs in the treatment of
chemotherapeutic: disease. Specifically the use of cytotoxic drugs
to treat cancer.
Chimeric: A molecule derived from two different species of
animals.
Cytokine: Low molecular weight proteins that can either
stimulate or inhibit the proliferation or function
of immune cells.
Cytotoxic cells: Immune system cells capable of killing other
Diagnostic Radioisotope: cells. A radioisotope whose emission is capable of
providing an image similar to an x-ray to diagnose
disease.
European Medicines The agency responsible for drug product approval
Evaluation Agency or in the European Economic Community.
EMEA:
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First line chemotherapy: The administration of one or more of a combination
(in ovarian cancer) of chemotherapeutic agents usually consisting of a
platinum-based drug and paclitaxel.
Food and Drug The regulatory body that oversees the drug
Administration or FDA: development and approval process in the United
States.
Gene: The basic unit of heredity. Genes occupy a
specific location on a chromosome and are self-
producing, submicroscopic structures capable under
certain circumstances of giving rise to a new
character.
Health Protection Branch of The government department responsible for
Health Canada or HPB: supervising the drug development and approval
process in Canada.
Humoral response: An immune response mediated by antibodies in the
blood.
Hybridoma cells: Any continuously growing cell
line generated by the fusion of a
myeloma cell and a normal cell and
capable of producing antibodies.
Immunogenicity: The degree to which an antigen is capable of
eliciting an immune response.
Immunotherapy: A therapeutic approach to treat diseases by
stimulating or enhancing the immune response
against the disease.
Investigational New Drug An application to the FDA or other regulatory
Application or IND: bodies, which is submitted for approval prior to
beginning clinical trials.
In vitro: Studies or phenomenon which take place outside
the body.
In vivo: Studies or phenomenon which take place in the
body.
Lyophilized: A substance whose water content has been
substantially removed at low temperature and high
vacuum (freeze-dried).
Master Cell Bank or MCB: A well characterized stock containing specific
hybridoma cells that are used in the manufacture
of antibodies.
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Monoclonal Antibodies or Antibodies produce by hybridoma cells.
MAb:
MUC-1: A mucinous antigen associated with breast and
other cancers.
Murine: Of mouse origin.
Myeloma Cell: An immortal tumor cell originating or derived
from the bone marrow.
New Drug Application or A document submitted to the FDA or other
NDA: regulatory bodies containing all the pre-clinical
and clinical data collected on a drug to obtain
approval for marketing.
New Drug Submission or A document submitted to the HPB which is the
NDS: Canadian counterpart to the NDA.
PCT Application: An international patent application filed under
the provisions of the Patent Cooperation
Treaty, an international patent
filing system which provides
deferred patent rights in over 80
countries.
Peptide: A molecule containing several amino acids linked
together.
Peritoneal Cavity: The cavity of the human body which is enclosed
by a membrane lining the walls of the abdominal
and pelvic cavities.
Pharmacodynamic: The action of drugs at a cellular level.
Pharmacokinetic: The rates of absorption, distribution, metabolism
and excretion of drugs by the body.
Product License Application The application submitted to the FDA to qualify
or PLA: biological drug products for sale in the United
States.
Sera: The fluid component of blood after separation of
cellular components.
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Second-Line Chemotherapy Any one of a combination of drugs consisting of
(in ovarian cancer): Paclitaxel, Etoposide, CAP (cyclophosphamide,
adriamycin, cis-platin) or HCAP
(hexamethylmelamine and CAP) or
other drugs administered into
patients, who are either partial or
non-responders to first line
chemotherapy.
Tumor: An abnormal proliferation of malignant cells.
Tumor antigen or tumor An antigent that is predominantly expressed in
associated antigen or TAA: tumor tissues.
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PART I
ITEM 1 - DESCRIPTION OF THE BUSINESS
THE COMPANY
AltaRex Corp. ("AltaRex" or the "Company") is an emerging biotechnology company
focused on research, development and the commercialization of immunotherapeutics
for the treatment of solid tumor cancers. The products that the Company is
developing are based on its unique proprietary platform technology,
Anti-idiotype Induction Therapy or AIT(TM). AltaRex believes that AIT(TM)
induces the human immune system to produce its own highly effective anti-tumor
response. The Company has filed patent applications in approximately 80
countries for its AIT(TM) technology. See "Proprietary Protection."
AltaRex has recently amended its business strategy to concentrate specifically
on developing therapeutic products associated with its AIT(TM) technology.
AltaRex's products are modified murine monoclonal antibodies ("MAbs") developed
by the Company's scientists or licensed to the Company. The Company believes
that these MAbs may be used effectively in conjunction with traditional cancer
therapies.
The Company's lead product is the OvaRex(TM) drug. It utilizes a MAb having a
high degree of specificity to a tumor associated antigen ("TAA") that has been
found to be expressed in the majority of ovarian cancer patients. Administered
to patients intravenously, the Company believes that the product acts as an
immunotherapeutic agent by inducing or amplifying the human body's immune
response against ovarian cancer. The OvaRex(TM) drug entered a Phase IIb
clinical trial in Canada and patients were administered the drug in the first
quarter of 1997. Administration of the drug to patients in a U.S. Phase IIb
clinical trial began in the second quarter of 1998.
AltaRex is also developing additional cancer immunotherapeutics, based on its
AIT(TM) technology, for the treatment of breast (BrevaRex(TM)), colorectal
(GivaRex(TM)) and prostate (ProstaRex(TM)) cancers. The Company plans to
commence a Phase I clinical trial of the BrevaRex(TM) product in the second half
of 1998.
In its efforts to develop an integrated approach to the treatment of cancer, the
Company was also developing two technologies known as ImmunoRadio Therapy
("IRT(TM)") and ImmunoPhotodynamic Therapy ("IPT(TM)). However, as part of its
strategy to concentrate on developing therapeutic products associated with its
AIT(TM) technologies, the Company has terminated or substantially reduced most
of its in-house research and development efforts in areas unrelated to its
AIT(TM) technologies, including the IRT(TM) and the IPT(TM) technologies.
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The Company's primary objective is to develop and bring to market anti-cancer
therapeutics based on its AIT(TM) technology. The Company plans to continue to
focus its research activities on the discovery and the development of products
that maximize the utility and application of its AIT(TM) technology platform.
HISTORY
AltaRex was founded in November 1995 by Dr. Antoine Noujaim and a team of
collaborators to commence a business engaged in the discovery and development of
anti-cancer immunotherapeutics. Prior to founding AltraRex, Dr. Antoine Noujaim
was President of Biomira Research Inc., a wholly owned subsidiary of Biomira
Inc., a public company whose shares are traded on the Toronto Stock Exchange and
The Nasdaq Stock Market ("Biomira"). In 1995, Biomira planned to discontinue
funding the operations of Biomira Research Inc. Dr. Noujaim and other
collaborators believed that of the research projects undertaken by Biomira
Research Inc., the B43 antibody project (the OvaRex(TM) Program) had the
potential to be further developed into a product. As a result, in November 1995,
AltaRex acquired certain components of the OvaRex(TM) Program from Biomira and
its wholly owned subsidiary, Biomira Research Inc. and entered into an exclusive
licensing agreement pursuant to which it acquired the OvaRex(TM) trade name and
the exclusive world wide right to use, develop, manufacture and commercialize
(for anti-idiotype induction therapy applications) products based on the B43
antibody.
AltaRex is located at Campus Tower, Suite 300, 8625-112 Street, Edmonton,
Alberta, T6G 1K8 and the registered office of the Company is located at 1900,
715-5th Avenue S.W., Calgary, Alberta, T2P 2X6.
AltaRex U.S., Corp., the U.S. subsidiary, is located at Suite 125, 303 Wyman
Street in Waltham, Massachusetts 02154. AltaRex U.S., Corp was incorporated in
the State of Delaware on April 19, 1998 and will direct the business
development, clinical, regulatory, contract manufacturing and investor relations
efforts of the Company . Research, early product development and supporting
staff will continue to operate from Edmonton.
The Company's internet address is www.altarex.com.
PLAN OF OPERATION
The Company's plan of operation for the remainder of the year ending December
31, 1998 and for the year ending December 31, 1999 is to continue to develop and
test cancer immunotherapy products. The Company plans to continue the OvaRex(TM)
Phase IIb clinical trial in North America and to initiate other OvaRex(TM) and
BrevaRex(TM) clinical trials. Additionally, the Company plans to continue
product development programs for all of its products, including the GivaRex(TM)
and
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ProstaRex(TM) products, and to conduct research programs on second generation
AIT(TM) technologies and other therapeutic applications.
CANCER AND CONCURRENT THERAPIES
OVERVIEW
Cancer is a disease characterized by uncontrolled growth and spread of abnormal
cells. The disease is believed to occur as a result of a number of factors such
as genetic predisposition and external (chemicals, radiation) and internal
(immune status, hormones) causes. Epidemiologists estimate that the disease is
responsible for the death of approximately 6.0 million individuals throughout
the world on an annual basis, with approximately 555,000 of those deaths
occurring in the United States. It is estimated that 40% of all Americans will
ultimately be stricken with the disease. The majority of industrialized nations
report similar statistics (Scientific American, September 1996).
The world market for cancer therapeutics totals approximately US$ 6.5 billion,
and is expected to increase to US$ 14.7 billion by the year 2002. The majority
of cancer patients are people over the age of 65 and it is anticipated that as
the population continues to age, cancer treatment will likely become the single
largest health care expenditure in the United States, Canada and other
industrialized nations (Frost and Sullivan, World Cancer Therapeutic Markets,
August 1996).
To date, traditional approaches to the treatment of cancer have been based on a
combination of surgery, radiation and chemotherapy despite the increasing amount
of resources to develop new therapies for cancer, survival rates for cancer
patients have not materially improved over the last 15 years (American Cancer
Society, 1995 Cancer Facts & Figures).
OVARIAN CANCER
In the United States, Canada and Europe, ovarian cancer causes more deaths than
any other cancer of the female reproductive tract. It is estimated that in the
United States more than 26,000 new cases of ovarian cancer will be diagnosed and
more than 14,000 women will die from this disease annually (American Cancer
Society, 1996 Cancer Facts & Figures).
Although detection of the tumor at an early stage is now associated with an
improved chance for curative treatment, survival figures have not changed
significantly over the past 15 years. This is partially due to a lack of
efficient diagnostic methods or markers for routine tests which could increase
the number of patients diagnosed at the early stage of their disease.
Consequently, in most diagnosed patients, the tumor has already progressed to an
advanced stage (Stage III
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or IV), making therapeutic approaches more difficult. The five year survival
rates for women with regional and distant ovarian cancer are 49% and 23%,
respectively (American Cancer Society, 1996 Cancer Facts & Figures). Patients
diagnosed with advanced ovarian cancer usually demonstrate a survival time of
less than two years (Hoskins et al., Journal of Clinical Oncology, October
1992).
The therapeutic approach prescribed for those patients whose tumors have
progressed to an advanced stage consists of surgery (debulking) in combination
with adjuvant chemotherapy, which improves the patient's prognosis, particularly
if the residual tumor is smaller than two centimeters in diameter. Despite the
high rate of patients whose advanced stage cancer enters into clinical
remission, 90% of them will eventually suffer a recurrence of their disease, the
median time to disease relapse being 18 months (Hoskins et al., Journal of
Clinical Oncology, October 1992).
Those patients who either have residual tumors larger than two centimeters or
are left with progressive disease or a no change situation after first-line
chemotherapy have a particularly poor prognosis. These individuals typically
require additional chemotherapy within a period of only a few weeks or months.
Second-line chemotherapy, however, suffers from a lack of suitable therapeutic
agents as the tumors have usually become chemoresistant due to their inherent
heterogeneity and adaptability to preceding first-line treatment.
In recent years, new chemotherapeutic agents used either as single treatments or
in combination with other therapeutic agents have demonstrated an increase in
survival time by as much as 50%. However, despite their apparent positive effect
on survival time, these agents are generally associated with significant
toxicity and side effects that reduce the patient's quality of life.
Given the rigors of repeated chemotherapeutic treatments, and taking into
account the low response rates and the modest effects on survival time, patient
quality of life has become a major issue. This is increasingly true as ovarian
cancer affects a large number of older and postmenopausal women.
BREAST CANCER
Breast cancer is the most frequently diagnosed cancer in women. In North
America, breast cancer accounts for close to 18% of female cancer deaths and is
exceeded only by lung cancer which has shown a resurgence since 1985. Each year,
more than 185,000 new cases of breast cancer are expected to be diagnosed in the
United States alone, with more than 44,000 patients dying from it during the
year (American Cancer Society, 1996 Cancer Facts & Figures).
Breast cancer is typically considered a slow growing tumor. However, some
patients suffer from a more aggressive form of the disease and do not respond
well to any
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intervention. The disease has a propensity to metastasize to distant sites in
the body, beginning with nearby lymph nodes and then to other sites such as the
bone, liver and brain.
Survival is excellent with early stage disease and poor when extensive disease
is present. The use of aggressive screening with technologies such as digital
mammography appears to play an important role in mitigating early death due to
the disease. For the treatment of breast cancer, surgical treatment, either
lumpectomy or mastectomy, is usually combined with radiation therapy,
chemotherapy or hormonal therapy. Multi-agent chemotherapy is the usual form of
treatment. The five year survival rate is 95% for patients with localized breast
cancer, 75% for patients with regional disease and 20% in women with distant
metastases (American Cancer Society, 1996 Cancer Facts & Figures).
GASTROINTESTINAL CANCER
Cancers of the gastrointestinal tract consist of three significant cancer
diseases: colorectal, stomach and pancreatic. New cases in the U.S. each year
for these three diseases are estimated to be 133,500, 26,300, and 24,000
respectively. Moreover, it is estimated that 55,000, 14,000 and 27,800
Americans, respectively, will die each year from these three cancers (American
Cancer Society, 1996 Cancer Facts & Figures).
Colorectal cancer comprises about 75% of all new cases of gastrointestinal
cancer. At the time of diagnosis, approximately 75% of patients with colon
cancer have local or regional disease and 25% have metastatic disease (Rubin
(ed.), Clinical Oncology, 7th Edition, 1993). The primary method of treatment of
colorectal cancer is surgery, often in conjunction with subsequent radiation
therapy. Approximately 61% of patients who undergo surgery for locoregional
colon cancer have developed recurrence of the disease. Most recurrences (70%)
occur within two years and almost all (90%) within five years (Rubin (ed.),
Clinical Oncology, 7th Edition, 1993). Adjuvant chemotherapy has been shown to
increase survival in patients with locoregional (Dukes'C) colon cancer. The five
year survival rates for early localized colon and rectal cancer are about 93%
and 87%, respectively, and for regional disease 63% and 53%, respectively, and
less than 7% for metastatic disease (American Cancer Society, 1995 Cancer Facts
& Figures).
PROSTATE CANCER
According to the American Cancer Society, prostate cancer is the second leading
cause of death from cancer in men. In 1998, an estimated 184,500 new cases will
be diagnosed in the U.S. and over 39,000 men will die from the disease. Between
1989 and 1992, prostate cancer incidence rates increased dramatically, probably
due to the increasing use of prostate-specific antigen (PSA) blood test
screenings (American Cancer Society, 1997 Cancer Facts & Figures).
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The American Cancer Society's guidelines for early prostate cancer detection
stress PSA blood tests and digital rectal exams of the prostate gland. Depending
on age, stage of the cancer and other medical conditions of the patient, surgery
or radiation are the treatments of choice. Fifty-eight percent of all prostate
cancers are discovered while still localized; the five-year relative survival
rate for patients whose tumors are diagnosed at this stage is 100%. Survival
after a diagnosis of prostate cancer continues to decline beyond five years.
According to the most recent date, 67% of men diagnosed with prostate cancer
survive 10 years and 50% survive 15 years.
IMMUNOLOGICAL THERAPEUTIC APPROACH
The immunological approach to cancer therapy is based on the principle that the
human immune system is capable of recognizing and eliminating cancer cells. In
cancer patients, the immune system has failed, for unknown reasons, to respond
to the presence of cancer cells. Immunotherapeutic approaches attempt to
stimulate and enhance an anti-cancer response by the patient's own immune
system.
The Company believes that the immunological therapeutic approach has inherent
advantages in comparison to current conventional treatment practices.
Conventional therapeutic approaches to cancer are often radical in nature and
associated with severe side effects and toxicity, thereby compromising the
patient's quality of life. In addition, tumors treated conventionally often
re-emerge in more aggressive and treatment-resistant forms. Immunotherapy, which
can be utilized in combination with traditional treatments or as a single
treatment, is substantially less toxic than existing treatments and therefore
may improve the patient's quality of life. Furthermore, the Company believes
that immunotherapeutic approaches are potentially less costly to the health care
system than are existing approaches because the treatment can be performed on an
out-patient basis.
There are currently four immunological approaches to cancer therapy. They can be
classified as either tumor associated antigen (TAA) dependent (e.g., passive
antibody-based or active specific antigen-based) or independent (e.g., adoptive
cell-based or non-specific). The primary difference between immunotherapeutic
approaches is the method in which the immune system is stimulated and the nature
of the subsequent immune responses.
CONVENTIONAL IMMUNOTHERAPEUTIC APPROACHES TO CANCER THERAPY
[CHART WHICH ILLUSTRATES THE FOUR CONVENTIONAL IMMUNOTHERAPEUTIC APPROACHES
TO CANCER THERAPY: PASSIVE, ACTIVE SPECIFIC, ADOPTIVE, AND ACTIVE
NON-SPECIFIC.]
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ADOPTIVE IMMUNOTHERAPY
This form of therapy consists of the separation and stimulation of T-cells or
tumor cells, then exposing those cells to immunostimulates in vitro in order to
augment the immune system's response to tumor cells. The treated cells are then
expanded in numbers and reinjected into patients. Each patient serves as the
donor and recipient of his or her own T-cells. While efforts are being conducted
to make this therapy more effective, wide application remains difficult due to
the individual nature of the treatment.
NON-SPECIFIC IMMUNOTHERAPY
In general, this approach may be described as a method by which the immune
system is non-specifically stimulated in order to destroy the tumor. The use of
cytokines was proposed for this purpose, but after extensive clinical testing
the original promise has been tempered by the realization that few patients
appear to benefit from the use of cytokine therapy alone.
PASSIVE IMMUNOTHERAPY
This approach consists of the administration of certain immune molecules, such
as antibodies, to patients who do not produce them on their own. These
antibodies are generally administered in large quantities and, while targeting
the cancer cells, can also be designed to act on other cell types and molecules
which are necessary for tumor growth. For example, antibodies can be designed to
affect the tumor's blood supply, thereby inhibiting the tumor's expansion.
Alternatively, certain antibodies can act directly on the tumor by activating a
cellular system to attack the tumor after the antibody is attached to it. The
underlying assumption is that the antibody will recognize and bind to a
cancer-specific antigen which is not expressed on normal cells. Unfortunately,
some of the cancer antigens are also found on normal cells, which might also be
damaged at the same time.
ACTIVE SPECIFIC IMMUNOTHERAPY
Vaccines that are based on this therapeutic approach usually involve the
immunization of patients with irradiated tumor cells expressing a specific
antigen or by combining the antigen itself with an appropriate carrier molecule
and administering it together with an adjuvant and/or low doses of cytotoxic
drugs. Modern variations to this technique, called anti-idiotype antibody
therapy, consist of the formation and selection of an antigen mimic in the form
of an antibody that is administered in the manner described above. While this
technology holds promise, the development of an effective vaccine is highly
dependent on the accurate pre-selection of the antigen or antigen mimic.
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ALTAREX'S ANTI-IDIOTYPE INDUCTION THERAPY
The Company believes its AIT(TM) approach to immunotherapy is fundamentally
different from the conventional approaches to immunotherapy described above.
AIT(TM) technology involves the development of a murine antibody specific to a
tumor-associated antigen. This antibody is subsequently modified by a
proprietary technique and, after appropriate processing, is injected
intravenously into a patient. This results in a complex formation with the
patient's own circulating tumor antigens. It is the Company's belief that this
in turn results in an immune response having unique characteristics.
The Company believes that its AIT(TM) approach to immunotherapy may provide the
following advantages over conventional approaches to immunotherapy:
- - The AIT(TM) immunotherapeutic approach has been used to demonstrate the
stimulation of both a humoral and cellular immune response.
- - The AIT(TM) immunotherapeutic approach activates the immune system in
traditionally hard to treat late-stage cancer.
- - The AIT(TM) immunotherapeutic approach utilizes low dose and intravenous
injection of antibody.
- - The AIT(TM) immunotherapeutic approach is compatible with traditional
treatments.
The Company has not completed the clinical trials of its OvaRex(TM) product
necessary to confirm the efficacy of its AIT(TM) technology. As a result, while
the preliminary results from such trials are encouraging, there can be no
assurance that the Company's products will demonstrate sufficient therapeutic
benefit in the treatment of cancer patients that would lead to obtaining
regulatory approval.
BUSINESS OF THE COMPANY
THE AIT(TM) TECHNOLOGY
The development of the Company's AIT(TM) technology and related products has
been facilitated by advances in the field of immunotherapy that have
demonstrated the existence of cellular components known as tumor associated
antigens ("TAAs"). TAAs are located on the surface of cancer cells, circulate in
a patient's blood or sera and are associated with the presence of specific
cancer types. For example, the antigen CA125 is present at elevated levels in
80% of ovarian cancer patients (Bast et al., New England Journal of Medicine,
1993).
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The AIT(TM) technology is the process by which the Company produces, selects,
modifies and administers unique murine MAbs or component parts thereof that can
selectively bind to TAAs that are highly associated with certain types of
cancers. The Company has found that the selective binding of MAbs to TAAs can
induce a number of specific anti-tumor immune responses in a cancer patient.
The AIT(TM) technology, which was developed internally by employees of the
Company, is the subject of a patent application filed with the United States
Patent and Trademark Office. See "Proprietary Protection." The Company's first
AIT(TM) product, the OvaRex(TM) drug, is based on a murine MAb that was licensed
to the Company from Biomira. See "The OvaRex(TM) Product." AltaRex may license
or develop (as it has for its BrevaRex(TM) Product) other MAbs for future
AIT(TM) products.
The Company believes that it has developed a method to isolate groups of TAAs
associated with specific cancers. The isolated TAAs utilized by the Company to
develop murine MAbs having a high degree of specificity to a particular TAA. The
Company has shown that the MAb-B43, the primary component of the OvaRex(TM)
drug, has a high degree of specificity to the TAA CA125, the antigen expressed
by the majority of ovarian cancer patients. The Company has also developed other
murine MAbs that have high specificity to TAAs associated with breast and
gastrointestinal cancers. See "Clinical Experience of the OvaRex(TM) Product."
The mechanism of action of the Company's AIT(TM) technology is based on what the
Company believes is the ability of the human immune system to generate a highly
specific immune response to injected MAbs associated with specific TAAs. The
Company believes that certain murine MAbs may, upon administration to a cancer
patient, produce both a humoral and a cellular response in the patient's immune
system. See "The Company's Products Clinical Experience of the OvaRex(TM)
Product" below.
MECHANISM OF ACTION OF THE AIT(TM) TECHNOLOGY
There are four basic steps in the AIT(TM) technology process:
Step 1 IDENTIFICATION OF THE TUMOR ASSOCIATED ANTIGEN (TAA)
AltaRex has isolated specific antigens that have a high association with a
particular cancer. To date, TAA's have been identified and isolated for ovarian,
breast, colorectal and prostate cancers.
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Step 2 DEVELOPMENT OF THE MONOCLONAL ANTIBODY (AB1)
AltaRex uses the identified antigens to develop a murine MAb known as Ab1. This
MAb is used to elicit an immune response.
Step 3 MODIFICATION OF AB1 MONOCLONAL ANTIBODY
Using the Company's proprietary technology, antibodies from step two are
modified to increase their immunogenicity (the degree to which the injected
antibody is capable of eliciting an immune response). This process results in a
modified murine MAb (Ab1) that is ready for use.
Step 4 INITIATION OF THE AIT(TM) "CASCADE" OF EVENTS
The injection of the modified murine MAb into the patient initiates a cascade of
events. The uniqueness of the AIT(TM) technology may be attributed to the three
different mechanisms by which the antibody may exert its influence on tumor
cells. In the first instance, the injected Ab1 antibody stimulates production of
an anti-idiotype response. Secondly, the immunogenicity of the antibody leads to
a strong cellular immune response. Finally, administration of the antibody
results in the formulation of a TAA-antibody complex in the blood, and a novel
presentation of the TAA to the immune system. The result of this cascade of
events is a tumor specific humoral and cellular response capable of killing
cancer cells.
The Company has not completed the clinical trials necessary to confirm the
efficacy of its AIT(TM) technology. As a result, while the preliminary results
are encouraging, there can be no assurance that the Company's products will have
therapeutic benefit in the treatment of cancer patients that is sufficient to
obtain regulatory approval.
THE COMPANY'S PRODUCTS
The following chart sets forth certain information concerning the Company's
technologies and products. The research and development of all such products are
undertaken by the Company's employees:
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<PAGE> 20
SUMMARY OF TECHNOLOGIES AND PRODUCTS
- --------------------------------------------------------------------------------
TECHNOLOGY APPLICATION PRODUCT CANDIDATES
---------- ----------- ------------------
- --------------------------------------------------------------------------------
Platform AIT(TM) Technology o Ovarian cancer o OvaReX(TM)
o Breast cancer o BrevaRex(TM)
o Gastrointestinal o GivaRex(TM)
cancer
o Prostate cancer o ProstaRex(TM)
- --------------------------------------------------------------------------------
Second Generation o Targeted AIT(TM) o Bifunctional
Technologies immunotherapy for antibody
o Recombinant bifunctional ovarian and other
antibodies cancers
- --------------------------------------------------------------------------------
New Applications o Targeted AIT(TM) o Multiple diseases
o Autoimmune Disease immunotherapy
- --------------------------------------------------------------------------------
The following product status chart shows the development status for the
OvaRex(TM), BrevaRex(TM), GivaRex(TM) and ProstaRex(TM) immunotherapeutics.
AIT(TM) PROGRAM STATUS
[CHART WHICH ILLUSTRATES THE STAGE OF DEVELOPMENT OF EACH OF THE COMPANY'S
PRINCIPAL PRODUCTS IN DEVELOPMENT.]
THE OVAREX(TM) PRODUCT
The Company's lead product is the OvaRex(TM) drug. Prior to 1995, a research
program for the OvaRex(TM) drug was initiated at Biomira Research Inc. In 1995,
the Company acquired from Biomira certain assets and licensed certain
technologies, including the antibody B43, which is utilized in the OvaRex(TM)
drug. See "History." Under the terms of a licensing agreement with Biomira, the
Company has a license to use the antibody B43 in connection with the development
of anti-idiotype induction therapy products and applications. See "Strategic
Alliances and License Agreement."
The OvaRex(TM) drug uses a murine MAb having a high degree of specificity to a
TAA expressed by the majority of ovarian cancer patients (CA-125) and has been
administered to patients in clinical trials intravenously without any adjuvant
drugs. The Company believes that the product acts as an immunotherapeutic agent
by
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<PAGE> 21
inducing or amplifying the human body's immune response against ovarian cancer.
This response is characterized by a cascade of events involving the production
of specific antibodies and cytotoxic T cells in the body which target the tumor
cells. The Company believes that this combination of humoral and cellular
AIT(TM) action account for the observed improvement in the clinical outcome of
patients receiving the OvaRex(TM) drug.
THE BREVAREX(TM) PRODUCT
The Company is developing a cancer immunotherapeutic based on the AIT(TM)
technology for the treatment of breast cancer. Current efforts by the Company's
scientists for the BrevaRex(TM) drug are directed toward the development of a
modified murine antibody that recognizes a specific tumor marker expressed on a
mucin ("MUC-1") secreted by breast cancer cells. This tumor marker, known as
CA15.3, is associated with the recurrence of breast cancer in 90% of women who
had been previously treated for this disease (Berry et. al., British Journal of
Cancer, 1985).
The Company has established a master cell bank in order to produce a limited
quantity of clinical grade murine MAb and to develop all necessary assay
procedures required for the characterization of the antibody and to support
clinical trials that are anticipated to begin in the second half of 1998.
THE GIVAREX(TM) PRODUCT
The Company has commenced development work on an application for
gastrointestinal cancers based on the AIT(TM) technology. The Company has
selected a tumor antigen known as CA19.9 that is expressed in most
gastrointestinal cancers, including colorectal, stomach and pancreatic cancers
(Lamarez, Serological Cancer Markets, 1992). This antigen has been used to
develop a proprietary modified murine antibody for AIT(TM) applications. The
ability of this antibody to generate an anti-idiotype response in animals is
currently under investigation.
THE PROSTAREX(TM) PRODUCT
The Company is investigating an immunotherapeutic for prostate cancer based on
AIT(TM) technology and the tumor antigen known as Prostate Specific Antigen
(PSA).
HYPOCRELLIN
On August 15, 1996, the University of Alberta licensed to the Company a unique
photosensitizer chemical molecule called hypocrellin for photodynamic therapy
applications. Hypocrellin is a natural product derived from Chinese mushrooms.
Several investigators have demonstrated that it has superior therapeutic
properties compared to the currently available photosensitizers (Estey et al.,
Cancer
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<PAGE> 22
Chemotherapy and Pharmacology, 1996). More recently, the parent compound has
been synthetically produced via an efficient procedure for which patent
protection has been sought by its inventors and the Company. In connection with
the Company's determination to focus on its AIT(TM) technology, the Company has
made the Hypocrellin project a low priority.
SECOND GENERATION TECHNOLOGIES
The strategy of the Company is to continue to engage in research activities and
to develop new technologies for the immunotherapy of cancer. The Company
anticipates that such technologies may lead to second generation products that
will provide market protection through patents and will improve the quality and
efficacy of the Company's primary products. Thus, the Company has commenced a
program to evolve and broaden the first line of murine based antibody technology
in order to develop both increased specificity and efficacy of the Company's
products.
CLINICAL EXPERIENCE WITH THE OVAREX(TM) DRUG
An earlier formulation (for imaging purposes) of the OvaRex(TM) drug has been
administered to more than 200 patients in prior clinical studies. Of the
patients receiving the imaging antibody, about 50% have been evaluated for
immunological response to the OvaRex(TM) drug. The principal investigators have
observed that following the administration of the imaging antibody, particularly
in those patients who received several doses, the patients developed an
anti-idiotype response.
A retrospective statistical analysis, initially prepared by an independent
statistician at the University of Dortmund in Germany, identified a
statistically significant treatment effect in the survival time of patients
receiving the earlier OvaRex(TM) drug, when compared to a historical group
treated with conventional chemotherapy. An additional independent analysis by a
statistician at the University of Western Ontario in Canada was undertaken with
almost identical results. The following graph illustrates the adjusted survival
curves. In this Cox Statistical Analysis, the median length of survival was 30
months for the group on conventional chemotherapy and 59 months for the group
that received the earlier formulation of the OvaRex(TM) drug. Additionally, the
five year survival rates as determined by this analysis were 11.4% for the
chemotherapy group and 40.7% for the earlier OvaRex(TM) drug.
The Cox Analysis is a statistical method of comparing two different populations
with respect to the length of survival of patients who received a drug with
those who did not, while balancing the effect of other parameters that can also
affect survival.
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<PAGE> 23
ADJUSTED OVERALL SURVIVAL CURVES OF OVARIAN CANCER PATIENTS
TREATED WITH MAB B43 AND WITH CHEMOTHERAPY
[GRAPH WHICH PLOTS THE SURVIVAL CURVES OF PATIENTS TREATED WITH MAB B43 AND
WITH CHEMOTHERAPY OVER A SEVEN YEAR INTERVAL.]
The Company has not completed the clinical trials necessary to confirm the
efficacy of the Company's AIT(TM) technology. As a result, while the preliminary
data are encouraging, there can be no assurance that the Company's products will
have therapeutic benefit in the treatment of cancer patients that is sufficient
to obtain regulatory approval.
REGULATORY STATUS
THE OVAREX(TM) DRUG
Based on the encouraging results obtained in the studies conducted to date, the
Company has initiated a prospective multi-center Phase IIb clinical trial with
ovarian cancer patients to definitively evaluate the clinical utility of the
OvaRex(TM) drug.
In Canada, the Company received approval from the HPB on October 1, 1996 to
conduct the Phase IIb clinical trial. Patient enrollment commenced in a number
of major cancer centers in Canada in early 1997. In the U.S., the Company
received Orphan Drug Designation for the OvaRex(TM) drug on November 26, 1996
and received approval from the FDA on May 23, 1997 to proceed with the Phase IIb
trial. The first patient was treated in April 1998. This potentially pivotal
trial will recruit 336 patients, is randomized, controlled, and multi-centered.
The Company also plans to conduct additional Phase II trials beginning in 1998
in patient populations that differ from the ongoing potentially pivotal Phase
IIb trial. In addition, the Company plans to initiate a Phase I and Phase II
bioequivalence trial of murine antibody using cell culture material.
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<PAGE> 24
THE BREVAREX(TM) PRODUCT
The Company also plans to submit on IND and initiate a BrevaRex(TM) Phase I
clinical trial in the second half of 1998. The Company intends to initiate a
pharmacokinetic/safety study in patients under an approved IND. The patients
from this study will also be assessed further to monitor clinical response in
the Phase I trial.
STRATEGIC ALLIANCES AND LICENSE AGREEMENTS
In keeping with its mission to remain an innovative research-based
biopharmaceutical company, the Company is seeking to license the products it
develops to corporate partners. These partners would participate in the later
stage clinical development of products as required by the FDA, HPB, EMEA and
other international drug regulatory agencies. The partners would then have the
opportunity to market the Company's products in return for payment to the
Company of up-front licensing fees, milestone payments and royalties. The major
objectives in seeking to license products to corporate partners include:
o Obtaining up-front payments, milestone payments and payments for equity of
the Company in connection with product licensing rights;
o Minimizing research and development expenditures through cost sharing
programs;
o Having access to the resources and experience of large multinational
pharmaceutical corporations; and
o Maximizing long term revenue streams from royalties on the sale of the
company's products.
The Company has no current plans for developing in-house manufacturing (beyond
the pilot phase), marketing or sales capabilities. The Company believes that the
biopharmaceutical industry has adequate manufacturing, marketing and sales
capacity, which the Company believes it may access through contractual or
partnership arrangements.
The Company's strategic alliances and collaborative partnerships are described
below:
DRAXIS HEALTH INC.
The Company is a party to an alliance agreement with Draximage Inc., a wholly
owned subsidiary of Draxis Health Inc. Under this agreement, the Company and
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<PAGE> 25
Draximage are collaborating on the product development and manufacture of pilot
and scale up batches of the OvaRex(TM) drug. Draximage has agreed to manufacture
vials of the OvaRex(TM) drug for clinical trials at a fixed price per vial and
will have certain rights with respect to the manufacture or marketing of the
OvaRex(TM) drug for commercial purposes.
UNIVERSITY OF ALBERTA
The Company has an alliance with the University of Alberta, the location of the
Company's leased laboratory and office space. This alliance provides the Company
with access to the intellectual talent present at Canada's second largest
university, as well as the many scientific institutes operating under its
umbrella. The Company believes that scientific networking with senior academic
staff in the Facilities of Science, Pharmacy and Medicine has resulted in a
number of joint scientific projects which in the medium and long term will
provide it with technologies to allow it to compete with future developments in
its field. In this regard, the Company is collaborating with the University of
Alberta on projects designed to enhance the targeting abilities of the Company's
AIT(TM) products as well as develop advanced technology to improve the
performance of the present product candidates.
ALBERTA HERITAGE FOUNDATION AGREEMENT
The Alberta Heritage Foundation for Medical Research (AHFMR) is a foundation
established by the Government of the Province of Alberta to support medical
research in the Province of Alberta. The AHFMR contributed $500,000 to the
funding of the current Canadian Phase IIb trial of the OvaRex(TM) product. The
Company is required to repay this contribution and to pay a royalty equivalent
to the amount actually received upon the commercial sales of the product, at a
rate of the lesser of 5% of gross sales or $100,000 per annum. In addition, in
connection with this agreement the Company granted to the AHFMR warrants to
purchase 41,667 Common Shares at an exercise price of $12.00 per share.
BIOMIRA LICENSE AGREEMENT
The Company holds an exclusive world-wide license from Biomira for the use of
the murine working hybridoma cell bank and murine antibody MAb-B43 for all
anti-idiotype induction applications and products, as well as for the use of
such related experimental and clinical data for anti-idiotype induction
applications and products until November 30, 2010. MAb-B43 is the functional
component of all OvaRex(TM) products.
The Company obtained the License from Biomira Inc. pursuant to a license
agreement dated November 24, 1995 (the "License Agreement"). Under the terms of
the License Agreement:
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<PAGE> 26
o The Company paid an up-front fee of $150,000;
o The Company agreed to use its best efforts to commercialize the technology;
o The Company agreed to spend a minimum of $3,000,000 to develop the
technology from December 1, 1995 to December 1, 1999; and
o The Company agreed to pay a royalty to Biomira Inc. on the sale of any
products developed using the B43 technology at various rates for a period
of ten (10) years from December 1, 1995 to November 30, 2005.
The License Agreement only pertains to the products that will potentially use
MAb B43 or a derivative thereof. The Company believes that it is currently in
compliance with all of the terms of the License Agreement.
Other Company developed AIT(TM) products are not subject to the Biomira
Licensing Agreement, and the Company is not obligated to pay external royalties
to any third parties in respect of such products.
MANUFACTURING
The Company does not currently manufacture any of its products and it has no
immediate plans to establish manufacturing facilities for commercial production
of its therapeutic products. Instead, the Company's strategy, beyond the pilot
phase, is to manufacture and commercialize its products through strategic
alliances and licensing agreements with major pharmaceutical companies.
HUMAN RESOURCES
As at May 15, 1997, the Company had 49 employees, 40 of whom were located at the
Company's head office in Edmonton, Alberta and nine of whom were located at the
office of the Company's U.S. subsidiary in Waltham, Massachusetts. There were 38
employees working in research and development and 11 working in administration
and corporate affairs. Twelve employees hold Ph.D.'s, nine hold masters degrees
and 20 have undergraduate degrees or technical school diplomas.
None of the employees are governed by a collective bargaining agreement. The
Company believes that working relationships with its employees are excellent.
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<PAGE> 27
REGULATORY REQUIREMENTS
Regulations imposed by government authorities in Canada and the United States,
as well as their counterparts in other countries, are a significant factor in
the conduct of the research, development, manufacturing and eventual marketing
activities for the Company's proposed products. In Canada, these activities are
regulated by the Food and Drug Act (Canada) and the rules and regulations
promulgated thereunder, which are enforced by the Health Protection Branch of
Health Canada (the "HPB"). Drugs and biological products are subject to rigorous
regulation by the Food and Drug Administration (the "FDA") in the United States
and by the European Medicines Evaluation Agency ("EMEA") in Europe. The
regulatory processes in Canada, the United States and Europe follow the same
essential steps although timing and results may be different.
The regulatory process for the development and approval of a new drug includes
the conduct of pre-clinical and clinical trials. The duration of those trials
and number of subjects required to meet the requirements of the various
authorities may vary according to, among other things, the disease studied, the
seriousness of the side effects and the nature of the proposed treatment.
PRE-CLINICAL STUDIES
The purpose of pre-clinical studies is essentially to determine the safety,
pharmacokinetics and efficacy of a new drug in animals before it is administered
to humans. The data collected during pre-clinical studies must be presented in
the form of an Investigational New Drug ("IND") application to the regulatory
authorities in the country where clinical studies will be conducted. In the
United States, unless otherwise notified, clinical studies may begin 30 days
after the IND application is filed, whereas in Canada, clinical studies may not
begin until 60 days after the application is submitted.
CLINICAL TRIALS
PHASE I CLINICAL STUDIES
Phase I clinical studies are commonly performed in healthy human subjects or,
more rarely, in selected patients with the targeted disease or disorder. The
objective of these trials is to study the pharmacokinetics and pharmacodynamics
of the drug, as well as the toxicity of the treatment and the patient's
tolerance to it. Data regarding the absorption, distribution, metabolism and
excretion of the drug is also compiled in Phase I clinical studies.
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PHASE II CLINICAL STUDIES
In Phase II clinical studies, preliminary evidence is sought regarding the
pharmacological effects of the drug and the desired therapeutic efficacy with a
small number of patients with the targeted disease. At this stage, efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level and dosage schedule. Additional safety data may also be compiled
from these studies.
Phase IIb (sometimes called Phase II/III in Canada) studies can be undertaken
for serious or fatal diseases. Phase IIb studies can lead to expedited review
and accelerated approval by the FDA of the product for commercial sale
conditional upon the completion of subsequent Phase III post-market information
studies. Phase IIb studies incorporate certain design and control features of
Phase III studies. If data collected from Phase IIb trials are statistically
significant, authorization for accelerated approval may be sought from the FDA.
PHASE III CLINICAL STUDIES
The Phase III clinical development program generally consists of expanded,
large-scale studies of patients with the targeted disease or disorder so as to
obtain definitive statistical evidence of the efficacy and safety of the
proposed product and dosing regimen in comparison with standard therapy.
After an appropriate analysis, the HPB, FDA or EMEA may interrupt clinical
studies at any stage if the drug has a clear efficacy advantage or,
alternatively, if the health of the subjects is threatened or the side effects
are not compensated for by the drug's benefits.
REGULATORY APPROVAL
Once Phase III clinical studies have been completed, the applicant will compile
all results, as well as all information concerning the product and its
composition, synthesis, manufacture, packaging and labeling methods, for the
purpose of obtaining approval to market the product. This application is known
as a New Drug Application ("NDA") or a Biologics License Application ("BLA") in
the United States and as a New Drug Submission ("NDS") in Canada. Government
authorities may require that Phase IV studies be performed after the product is
marketed to assess its long-term effects.
Since drug manufacturing is also regulated, the applicant is required to ensure
that it complies with the cGMP, which are quality standards that require the
control of production activities, raw-material procurement, complaint
management, product recalls, labeling and promotional material. In addition to
these standards, which are
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common to all drugs, manufacturers of biopharmaceutical products must
demonstrate that their product is homogeneous from one lot to the next, failing
which the regulatory authorities concerned may prohibit the sale of a lot and
possibly require that a product be recalled.
ACCELERATED APPROVAL
The FDA has regulations which are intended to accelerate the process involved in
validating the development, assessment and marketing of new diagnostic drugs or
drugs used for the treatment of serious diseases for which there is no other
satisfactory treatment. The fast-track designation enables the FDA to
collaborate in the process of establishing research protocols and enables, but
does not oblige, the FDA to approve the marketing of the product immediately
after the conclusion of Phase II clinical studies. The FDA may nonetheless
require that Phase III clinical tests be completed even if prior approval for
marketing has been received. The HPB and EMEA also have a priority assessment
procedure to approve new drugs for the treatment of serious diseases for which
there is no other satisfactory alternative treatment.
ORPHAN DRUG STATUS
Orphan drug designation is designed to facilitate the introduction of drugs into
the U.S. market for use in treating rare diseases or conditions. The disease
must affect fewer than 200,000 patients per year in the U.S. Upon obtaining
marketing approval for the drug, the FDA will grant a period of seven years
during which no approval will be given to a subsequent sponsor of the same drug
product for the same indication. Written application for orphan-drug status must
be submitted to the Office of Orphan Drug Products Development of the FDA and
must include documentation supporting the request for the particular indication.
Orphan drug designation also allows the manufacturer to apply for grants from
the U.S. government to help defray the cost of the clinical testing of the drug
in the U.S.
COMPETITION
The biopharmaceutical industry is intensely competitive. Many companies,
including other biopharmaceutical companies and biotechnology companies, are
actively engaged in activities similar to those of the Company, including
research and development of drugs for the treatment of cancer. More
specifically, competitors for the development of new therapeutic products to
treat cancer focus on MAb based cancer therapeutics, cancer vaccines and other
approaches that are based on either stimulation of the body's own immune
response or on MAbs. Many of these companies have substantially greater
financial and other resources, larger research and development capabilities and
more extensive marketing and manufacturing organizations than the Company. In
addition, some such companies have
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considerable experience in pre-clinical testing, clinical trials and other
regulatory approval procedures. There are also academic institutions,
governmental agencies and other research organizations which are conducting
research in areas in which the Company is working; they may also market
commercial products, either on their own or through collaborative efforts.
The Company expects to encounter significant competition for the pharmaceutical
products it plans to develop. Companies that complete clinical trials, obtain
required regulatory approvals and commence commercial sales of their products
before their competitors may achieve a significant competitive advantage. In
addition, certain pharmaceutical and biotechnology firms, including major
pharmaceutical companies and specialized structure-based drug design companies,
have announced efforts in the field of immunological therapy that exploit the
presence of TAAs, and the Company is aware that other companies or institutions
are pursuing development of new drugs and technologies directly targeted at
applications for which the Company is developing its biopharmaceutical products.
The Company expects that its platform AIT(TM) technology design will attract
significant additional competitors over time. In order to compete successfully,
the Company's goal is to develop proprietary positions in patented drugs for
therapeutic markets which have not been satisfactorily addressed by conventional
research strategies and, in the process, extend its expertise in
biopharmaceutical products design. See "Risk Factors -- Competition."
PROPRIETARY PROTECTION
PATENTS
The Company's success depends, in part, on its ability to obtain patents,
maintain its trade secrets and operate without infringing the proprietary rights
of third parties. The Company attempts to protect any products and processes
developed by it under the intellectual property laws of Canada, the United
States and other major market countries.
The Company filed a PCT application on May 15, 1996 entitled "Method and
Composition for Reconforming Multi-Epitopic Antigens to Initiate an Immune
Response" which encompasses that AIT(TM) technology. On June 18, 1997, the
Company filed an application for this patent in the United States. The PCT is an
international application that provides deferred patent filing rights in over 80
jurisdictions, including Canada, the United States, Japan and Europe. The scope
of protection sought in the PCT application is relatively broad and encompasses
injection of an antibody into an immunocompetent patient to initiate an
anti-tumor immune response. Thus, the scope of protection sought in the PCT
application has wide application, including use of the AIT(TM) technology to
treat ovarian, breast, colorectal and prostate cancer by selecting appropriate
antigens and antibodies.
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The Company is the beneficial owner of a series of patent applications for an
invention entitled "Selective Alteration of Antibody Immunogenicity." The patent
applications for this invention are currently pending in the following
jurisdictions: Japan and Europe (includes Austria, Belgium,
Switzerland/Liechtenstein, Germany, Denmark, Spain, France, United Kingdom,
Greece, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal and Sweden).
If the Company abandons diligent pursuit of any of these patent applications, it
is obligated to so notify Biomira Inc. and Biomira Inc. is entitled to request
an assignment to it of any such patent applications. These patent applications
do not encompass the current AIT(TM) technology.
On January 10, 1997, the Company filed a U.S. patent application to protect its
IPT(TM) product, and a PCT application for this technology was filed on January
9, 1998. A U.S. application was also filed on June 18, 1997 that potentially
protects the manufacture of the modified antibodies for AIT(TM).
Under the License Agreement with Biomira, the Company has the exclusive,
worldwide right and license to use MAb-B43 to develop, commercialize,
manufacture, use and sell products which are related to anti-idiotype
applications. The license includes rights under a PCT application filed by
Biomira Inc. on July 6, 1993 and entitled "Photoactivation of Proteins for
Conjugation Purposes."
Although the scope of patent protection which ultimately may be afforded by the
Company's patent applications is difficult to quantify, the Company believes its
patent strategy will afford adequate protection to conduct its business
operations as described in this registration statement.
The Company also relies upon and intends to continue to rely upon trade secrets,
unpatented proprietary know-how and continuing technological innovation to
develop and maintain its competitive positions. Much of the Company's know-how
and technology may not be patentable. To protect its rights, the Company
requires all employees, consultants and collaborators to enter into
confidentiality/non-disclosure agreements with the Company.
TRADEMARKS AND TRADE NAMES
The Company has obtained the rights to six trademarks from Biomira Inc. and is
currently pursuing the registration of those trademarks in relation to its field
of technology. These trademarks may impart product and/or technology recognition
unique to the Company and establish worldwide recognition of these
products/technologies. Several of the trademarks have been issued in Germany,
Austria and Canada, with the remaining applications pending review by the
various countries involved.
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MEDICAL AND SCIENTIFIC ADVISORY BOARD
The Medical and Scientific Advisory Board (the "Advisory Board") of the Company
is composed of seven, outside internationally recognized clinicians and
scientists. The Advisory Board currently meets on an annual basis to review the
operational aspects of the Company's technology and make appropriate
recommendations with regards to the perceived trends and scientific direction of
other companies. The members of the Advisory Board have no rights to the
Company's technology and each member has signed a confidentiality agreement with
the Company. Advisory Board Members receive a small honorarium and stock options
for their services. The composition of the Advisory Board is:
- --------------------------------------------------------------------------------
NAME INSTITUTION
---- -----------
- --------------------------------------------------------------------------------
Professor D. Goodwin Stanford University, U.S.A.
- --------------------------------------------------------------------------------
Professor A. Serafini University of Miami, U.S.A.
- --------------------------------------------------------------------------------
Professor J.F. Chatal University of Nantes, France
- --------------------------------------------------------------------------------
Professor C.A. Bona Mt. Sinai School of Medicine,
U.S.A.
- --------------------------------------------------------------------------------
Professor J.W. Lown University of Alberta, Canada
- --------------------------------------------------------------------------------
Professor D.L. Mann University of Maryland, U.S.A.
- --------------------------------------------------------------------------------
Professor P. Muller University of Toronto, Canada
- --------------------------------------------------------------------------------
Dr. David Goodwin, M.D. is a Professor of Radiology at Stanford University
School of Medicine and the Chief of Nuclear Medicine at Stanford University
Medial Center, Veterans Administration Medical Center, Department of Diagnostic
Radiology and Nuclear Medicine. Dr. Goodwin has held appointments at these two
institutions since 1967. He received his B.Sc. and M.D. degrees from the
University of Manitoba and the University of Manitoba Medical College. From 1959
to 1967, Dr. Goodwin was a resident physician at the Winnipeg General Hospital,
the Royal Victoria Hospital in Montreal, the Queen Mary Veterans Hospital in
Montreal and John Hopkins Hospital in Baltimore. Dr. Goodwin has received awards
and honours as the co-recipient of the George von Hevesy Prize for Nuclear
Medicine (awarded on the occasion of the First World Congress of Nuclear
Medicine in 1974), the John Hopkins University Nuclear Medicine Distinguished
Alumnus Award in 1983 and the Distinguished Scientist Award for 1988, presented
at the 13th Western Regional Society of Nuclear Medicine. Dr. Goodwin is on the
editorial board and acts as a reviewer for several academic journals. He has
authored over 223 publications and abstracts.
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Dr. Aldo Serafini, M.D. has been a Professor of Medicine and Radiology at the
University of Miami, School of Medicine since 1984. Dr. Serafini received a M.D.
degree from the University of Witwatersrand, Johannesburg, South Africa in 1966.
From 1967 to 1972, he was a resident physician at the Jackson Memorial Hospital
in Miami. Dr. Serafini is a member of the attending staff at the University of
Miami Hospital and Clinic, the University of Miami/Jackson Memorial Medical
Center and at the Cedars Medical Center in Miami. Dr. Serafini has numerous
teaching, university committee and administrative responsibilities and is on the
editorial board and acts as a reviewer for several academic journals. Dr.
Serafini has had 10 visiting professorships awarded to him and has had over 233
books, monograms and abstracts published.
Dr. Jean Francois Chatal, M.D. is a University Professor, Hospital Practitioner
at the College of Medicine at the University of Nantes, France and has held a
hospital position as the Head of the Nuclear Medicine department of the Regional
Cancer Center in Nantes since 1975. He received his Bachelor of Science degree
at the University of Rennes in 1963 and his Doctor of Medicine degree from the
University of Nantes in 1973. notably, he received a Doctor of Philosophy (Human
Biology) degree from the University of Bordeaux, France in 1983. Dr. Chatal has
professional responsibilities, among others, as the Head of the
Biophysics-Oncology Group, INSERM Unit 211 in regards to the research field
entitled Diagnostics and Therapeutic Applications of Radiolabeled Monoclonal
Antibodies in Oncology. He is a member of several learned societies and has been
involved in several scientific missions sponsored by the International Atomic
Energy Association, the World Health Organization and the French Foreign Office.
Dr. Constantin Bona, M.D., Ph.D. Professor of Microbiology at the Mt. Sinai
School of Medicine, New York, N.J., is the world's leading specialist in the
field of anti-idiotype applications. As the author of more than 280 scientific
publications and 12 textbooks in the field, Professor Bona's contributions have
been most influential in bringing forth the potential of this technology in the
area of cancer therapy. He is also a member of the Royal Society of Medicine,
Chief Editor of four International Scientific journals, and serves on the
Editorial Board of more than 16 other journals.
Dr. William Lown, Ph.D., D.I.C. Killiam Professor Chemistry at the University of
Alberta. Among the many awards received by him, he is the winner of the Paul
Ehrlich prize as well as the Hoffmann-La Roche prize for his numerous
contributions in the field of Medicinal Chemistry. As the author of more than
350 scientific publications, his work on the design of compounds for cancer
therapy makes him the foremost scientist in this field in Canada.
Dr. Dean Mann, Ph.D. Head of the Division of Immunogenetics at the university of
Maryland (U.S.A.), has served for more than 25 years at the National Cancer
Institute (NCI) in various capacities including Head of Biochemical Epidemiology
and Head of
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<PAGE> 34
Immunogenetics at the NCI. His work, which was published in more than 220
scientific manuscripts is recognized for its contribution in the field of viral
immunology and its relationship to cancer.
Dr. Paul Muller, M.D., F.R.C.P. In addition to his role as Professor of Surgery
at the University of Toronto he is also the Surgeon-in-Chief at St. Michael
Hospital. His more than 100 publications including the area of photodynamic
therapy of cancer makes him the leading Canadian expert in the clinical
application of this technology.
RISK FACTORS
An investment in the securities of the Company should be considered highly
speculative due to the nature of the business of the Company and the present
stage of its development. In evaluating the securities of the Company, the
following should be considered:
POSSIBLE EXPIRATION OF LICENSE AGREEMENT FOR MAB-B43; LOSS OF EXCLUSIVITY
The Company's license with Biomira requires that the Company use its best
efforts to commercialize the technology and to spend certain minimum amounts to
develop the technology between 1995 and 1999. See "Strategic Alliances and
License Agreements." Although the Company believes it is currently in compliance
with all of the terms of the License Agreement, there can be no assurance that
the Company will be able to continue to meet the obligations of the License
Agreement. Should the Company's rights under the License Agreement cease to be
exclusive, Biomira may elect to license the MAb-B43 technology to competitors of
the Company. Although the Company believes that it would have a competitive
advantage over other potential competitors based on its lead time in the
regulatory process, the loss of exclusivity to the MAb-B43 technology could have
a material adverse affect on the Company's business, its results of operations,
its financial condition and its ability to market and develop commercially
viable products based on the MAb-B43 technology.
In addition, the MAb-B43 License Agreement expires November 30, 2010. If at that
time the Company cannot successfully renew the License Agreement on terms
acceptable to the Company, the Company may be prevented from manufacturing and
marketing products that use the MAb-B43 technology after that time. There can be
no assurance that the License Agreement will be renewed on terms acceptable to
the Company, and the loss of such License Agreement or renewal of the License on
different terms may adversely affect the revenues, if any, from the sale of
products that use the MAb-B43 technology. The expiration of the License
Agreement could have a material adverse affect on the Company's business,
results of operations and financial condition.
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<PAGE> 35
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company's future success is dependent on the development and maintenance of
strategic relationships. The Company intends to rely upon its strategic partners
to license the products it develops and to participate in the later stage
clinical development of products as required by the FDA, HPB, EMEA and other
international drug regulatory agencies. The partners would then have the
opportunity to market the Company's products in return for payment to the
Company of up-Front licensing fees, royalties or previously agreed upon transfer
prices on the sale of such products.
The Company may rely on strategic partners to complete certain clinical trials
required for registration and regulatory approval of OvaRex(TM) product in world
markets. If the Company fails to enter such strategic relationships on terms
favorable to the Company or if these strategic partners fail to effectively
complete the clinical trials, the regulatory approval of OvaRex(TM) product may
be delayed, and such delay may have a materially adverse effect on the Company's
results of operations and business. The Company also intends to rely on
strategic partners to market the OvaRex(TM) product. If the Company fails to
enter such strategic partnerships or if these strategic partners fail to
effectively market OvaRex(TM) product, the Company may lose the opportunity to
successfully commercialize the product. There can be no assurance that the
Company will be able to enter these strategic partnerships on terms that are
acceptable to the Company.
The Company does not manufacture its own products. The Company has an alliance
agreement with Draximage to manufacture the OvaRex(TM) product for clinical
trials. If Draximage fails to perform under the terms of the agreement or the
Company is forced to seek another manufacturer of OvaRex(TM), the Company may
incur significant costs and risks.
The Company also relies on a number of alliances and collaborative partnerships
for the development of its products. There is no guarantee that these
relationships will continue or result in any successful developments.
UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING
Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential new products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. Results of the initial preclinical and clinical testing of products
under development by the Company are not necessarily indicative of results that
will be obtained from subsequent or more extensive preclinical and clinical
testing. Furthermore, there can be no assurance that clinical trials of products
under development will be completed
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or will demonstrate the safety and efficacy of such products at all or to the
extent necessary to obtain regulatory approvals. Companies in the biotechnology
industry have suffered significant setbacks in advanced clinical trials, even
after achieving promising results in earlier trials. The failure to adequately
demonstrate the safety and efficacy of a therapeutic product under development
could delay or prevent regulatory approval of such product.
The rate of completion of clinical trials depends on, among other factors, the
enrollment of patients. Patient accrual is a function of many factors, including
the size of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the study and the existence of competitive clinical
trials. Delays in planned patient enrollment in the Company's current clinical
trials or future clinical trials may result in increased costs, program delays,
or both.
LACK OF PRODUCT REVENUES; HISTORY OF LOSSES
To date, AltaRex has not recorded any revenues from the sale of pharmaceutical
products and there can be no assurance that significant additional losses will
not occur in the near future or that the Company will be profitable in the
future. The Company has accumulated net losses of approximately $7.1 million to
December 31, 1997. The Company anticipates that its operating expenses and
capital expenditures may increase significantly in 1998 and in subsequent years
as it adds the personnel and facilities associated with advancing products
throughout development, clinical trials and commercialization. The amounts and
timing of expenditures will depend on the progress of ongoing research and
development, the results of preclinical testing and clinical trials, the rate at
which operating losses are incurred, the execution of any development and
licensing agreements with strategic partners, the Company's development of
additional products, the FDA, HPB and other regulatory process and other
factors, many of which are beyond the Company's control.
The Company does not expect to receive revenues from commercial sales of its new
products for several years, if at all. The Company expects to continue to incur
losses unless and until such time as strategic alliance payments, product sales
and royalty payments generate sufficient revenues to fund its continuing
operations. The ability of the Company to achieve profitability in subsequent
years depends upon, among other things, successfully completing product
development efforts and obtaining regulatory approval for its lead clinical
products. The development of the Company's products will require the commitment
of substantial resources to conduct the time-consuming development of products
to meet market and regulatory requirements and to establish strategic
relationships for production capabilities. There can be no assurance that the
Company will generate any revenues or achieve profitability.
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The Company has several licensing agreements that require payments of royalties
based on the gross revenue of the products using the underlying technology. On
the successful commercialization of certain of its clinical products, the
Company will be required to pay royalties from the gross revenue received by the
Company on the sale of those products to the licensor of the technology. There
can be no assurance that the Company will generate sufficient revenues from the
sale of these products to achieve profitability.
The Company anticipates that, based on its current operating plan, its current
cash reserves are sufficient to fund the Company's planned cash requirements
into the second half of 1999. Beyond that, the Company intends to rely on
accumulated cash reserves, if any, cash generated from operations, licensing
revenues and collaborative agreements, which will be highly dependent on the
Company's successful development and commercialization of its clinical products.
There can be no assurance that these products will be successfully developed or
commercialized. Further, there can be no assurance that the underlying assumed
levels of expenses will prove to be accurate.
CAPITAL REQUIREMENTS
Based on its current operating plan, the Company estimates that its net
expenditures for 1998 will significantly exceed that of 1997. The Company's
future capital requirements, however, will depend on many factors, including
continued scientific progress in its product discovery and development program,
progress in its pre-clinical and clinical evaluation of product candidates, time
and expense associated with filing, prosecuting and enforcing its patent claims
and costs associated with obtaining regulatory approvals. In order to meet such
capital requirements, the Company will consider contract fees, collaborative
research and development arrangements, and additional public or private
financing (including the issuance of additional equity securities) to fund all
or a part of particular programs. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms. If adequate funds are not available, the Company may have to
reduce substantially or eliminate expenditures for research and development,
testing, production and marketing of its proposed products, or obtain funds
through arrangements with corporate partners that require the Company to
relinquish rights to certain of its technologies or products. There can be no
assurance that the Company will be able to raise additional capital if its
capital resources are exhausted. The ability of the Company to arrange such
financing in the future will depend in part upon the prevailing capital market
conditions as well as the business performance of the Company. There can be no
assurance that the Company will be successful in its efforts to arrange
additional financing if needed or that any such additional financing will be
available on terms satisfactory to the Company.
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KEY PERSONNEL
The Company is highly dependent on its senior officers, scientific personnel,
consultants and management staff, the loss of whose services might significantly
delay or prevent the Company's achievement of its scientific or business
objectives. Competition among biotechnology and biopharmaceutical companies for
qualified employees is intense, and the ability to retain and attract qualified
individuals is critical to the Company's success. There can be no assurance that
the Company will be able to attract and retain such individuals currently or in
the future on acceptable terms, or at all, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
REGULATORY ENVIRONMENT; NO ASSURANCE OF PRODUCT APPROVAL
The FDA, HPB and comparable agencies in foreign countries impose substantial
requirements on biotechnology and pharmaceutical companies prior to the
introduction of therapeutic products. These requirements include lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures, together which involve the
expenditure of substantial resources. Satisfaction of these requirements
typically takes a number of years and varies substantially based on the type,
complexity and novelty of the pharmaceutical product.
Any future FDA, HPB or other governmental approval of products developed by the
Company may entail limitations on the indicated uses for which such product may
be marketed. Approved products may be subject to additional testing and
surveillance programs as required by regulatory agencies. In addition, product
approvals may be withdrawn or limited for noncompliance with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
The effect of governmental regulation may be to delay marketing the Company's
products for a considerable period of time, to impose costly requirements on the
Company's activities or to provide a competitive advantage to other companies
that compete with the Company. Adverse clinical results could have a negative
impact on the regulatory process and timing. A delay in obtaining or failure to
obtain regulatory approvals could adversely affect the marketing of the
Company's products and the Company's liquidity and capital resources. In
addition, future legislation or administrative action may result in governmental
regulations adverse to the Company. The extent of potentially adverse
governmental regulation that might arise from future legislation or
administrative action cannot be predicted.
To date, the Company has submitted INDs to the HPB and FDA for OvaRex(TM)
product, but has not submitted such documentation for other products currently
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under development. There can be no assurance that the Company will obtain
regulatory approval to commercialize OvaRex(TM), or that it will be in a
position to file the regulatory applications for its future products.
COMPETITION
Technological competition in the pharmaceutical industry is intense. There are
many companies and institutions, both public and private, including
pharmaceutical companies, chemical companies, specialized biotechnology
companies and research, government or academic institutions, that are engaged in
developing synthetic pharmaceuticals and biotechnological products for human
therapeutic applications, including the applications targeted by the Company.
The Company may have to compete with these competitors to develop products aimed
at treating similar conditions. Many of these competitors have substantially
greater resources than the Company. There can be no assurance that developments
by others will not render the Company's products or technologies non-competitive
or adversely affect the commitment of the Company's commercial collaborators to
the Company's programs.
The pharmaceutical industry is also characterized by extensive research efforts
and rapid technological change. Competition can be expected to increase as
technological advances are made and commercial applications for
biopharmaceutical products increase. Competitors of the Company may use
different technologies or approaches to develop products similar to products
which the Company is seeking to develop, or may develop new or enhanced products
for processes that may be more effective, less expensive, safer or more readily
available before the Company obtains approval of its products. There can be no
assurance that the Company's products will compete successfully or that research
and development will not render the Company's products obsolete or uneconomical.
PROPRIETARY RIGHTS AND PATENT PROTECTION
Because of the length of time and expense associated with bringing new products
through development and the governmental approval process to the marketplace,
the pharmaceutical industry has traditionally placed considerable importance on
obtaining and maintaining patent and trade secret protection for significant new
technologies, products and processes.
The patent protection afforded to biotechnology and pharmaceutical firms is
uncertain and involves many complex legal, scientific and factual questions.
There is no clear law or policy involving the breadth of claims allowed in such
cases, or the degree of protection afforded under patents. These issues are
further complicated in this field by the abundance of publications and/or prior
art, including publications by the Company. Thus, while the Company believes
that its proprietary information is protected to the fullest extent practicable,
there can be no assurance that (i) any
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patents will be issued to the Company in any or all appropriate jurisdictions,
(ii) litigation will not be commenced seeking to challenge the Company's patent
protection or that such challenges will not be successful, (iii) processes or
products of the Company do not or will not infringe upon the patents of third
parties, or (iv) the scope of patents that may be issued to the Company will
successfully prevent third parties from developing similar and competitive
products. It is not possible to predict how any patent litigation will affect
the Company's efforts to develop, manufacture or market its products. The cost
of litigation to uphold the validity and prevent infringement of any patents
issued to the Company may be significant.
The products developed by the Company also incorporate technology and processes
that will not be protected by any patent and are capable of being duplicated or
improved upon by competitors. Accordingly, the Company may be vulnerable to
competitors, which develop competing technology, whether independently or as a
result of acquiring access to the proprietary products and trade secrets of the
Company. In addition, the Company may be required to obtain licenses under
patents or other proprietary rights of third parties. No assurance can be given
that any licenses required under such patents or proprietary rights will be
available on terms acceptable to the Company. If the Company does not obtain
such licenses, it could encounter delays in introducing one or more of its
products to the market while it attempts to design around such patents, or could
find that the development, manufacture or sale of products requiring such
licenses could be foreclosed.
MANUFACTURING AND MARKETING
The Company has limited experience in manufacturing pharmaceuticals. The Company
intends to rely primarily on contract manufacturers to produce antibodies,
adjuvants and other components of its products for research and development,
preclinical and clinical trial purposes. The Company's products have never been
manufactured on a commercial scale, and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. There can be no assurance that third party manufacturers
will be able to meet the Company's needs with respect to timing, quantity or
quality. If the Company is unable to contract for a sufficient supply of
required products and substances on acceptable terms, or if it should encounter
delays or difficulties in its relationships with manufacturers, the Company's
preclinical and clinical testing would be delayed, thereby delaying the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products. Any such delay may have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, contract manufacturers that the Company may use must continually
adhere to current Good Manufacturing Practices ("GMP") regulations enforced by
the FDA through its facilities inspection program. If the facilities of such
manufacturers cannot pass a pre-approval plant inspection, the FDA premarket
approval of the Company's products will not be granted.
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The Company currently has no sales, marketing or distribution experience. The
Company intends to rely on its current and future strategic partners, to market
its products; however, there can be no assurance that such corporate partners
have effective sales forces and distribution systems. If the Company is unable
to maintain or establish such relationships and is required to market any of its
products directly, the Company will have to develop a marketing and sales force
with technical expertise and with supporting distribution capabilities. There
can be no assurance that the Company will be able to maintain or establish such
relationships with third parties or develop in-house sales and distribution
capabilities. To the extent that the Company depends on its strategic partners
or third parties for marketing and distribution, any revenues received by the
Company will depend upon the efforts of such strategic partners or third
parties, and there can be no assurance that such efforts will be successful.
There can be no assurance that any products successfully developed by the
Company, if approved for marketing, will ever achieve market acceptance. The
Company's products, if successfully developed, will compete with a number of
traditional drugs and therapies manufactured and marketed by major
pharmaceutical and other biotechnology companies, as well as new products
currently under development by such companies and others. The degree of market
acceptance of any products developed by the Company will depend on the clinical
efficacy and safety of the product candidates, their potential advantage over
alternative treatment methods and reimbursement policies of government and
third-party payors. There can be no assurance that physicians, patients or the
medical community in general will accept and utilize any products that may be
developed by the Company, and the lack of such market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY AND INSURANCE
The testing, marketing, sale and use of products under development by the
Company may entail risk of product liability. Such risk exists in human clinical
trials and even with respect to those products that receive regulatory approval
for commercial sale. There can be no assurance that the Company can avoid
significant product liability exposure. The Company currently has in place
product liability insurance for its pharmaceutical products and expects that as
it expands, it will require additional insurance. There can be no assurance that
it will be able to obtain appropriate levels of product liability insurance
prior to any sale of its pharmaceutical products. An inability to obtain
insurance on economically feasible terms or to otherwise protect against
potential product liability claims could inhibit or prevent the
commercialization of products developed by the Company. The obligation to pay
any product liability claim or recall a product could have a material adverse
effect on the business, financial condition and future prospects of the Company.
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UNSTABLE SHARE PRICE
Market prices for securities of biotechnology companies generally, and of common
shares in particular, are volatile. Factors such as announcements (publicly made
or at scientific conferences) of technological innovations, new commercial
products, patents, the development of proprietary rights by the Company or
others, results of clinical trials, regulatory actions, publications, quarterly
financial results or public concern over the safety of biotechnological
products, future sales of common shares by the Company or by its current
shareholders and other factors could have a significant effect on the market
price of the common shares of the Company.
NO ASSURANCE OF SUCCESSFUL DEVELOPMENT
Prospects for companies in the biotechnology industry generally may be regarded
as uncertain given the nature of the industry and, accordingly, investments in
biotechnology companies should be regarded as highly speculative. The Company's
realization of its long-term potential will be dependent upon the successful
development and commercialization of products currently under development. There
can be no assurance that these products will be delivered successfully or
receive regulatory approval. The new products of the Company are currently in
the research and development stages, the riskiest stages for a company in the
biotechnology industry. There can be no assurance that the research and
development programs conducted by the Company will result in commercially viable
products. To achieve profitable operations the Company, alone or with others,
must successfully develop, introduce and market its products. To obtain
regulatory approvals for the products being developed and to achieve commercial
success, human clinical trials must demonstrate that the products are safe for
human use and that they show efficacy. Unsatisfactory results obtained from a
particular study relating to a program may cause the Company to abandon its
commitment to that program. No assurances can be provided that any future animal
or human test, if undertaken, will yield favorable results.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's Canadian office is located at Campus Tower, 300, 8625 - 112
Street, Edmonton, Alberta, Canada T6G 1K8. The Company's research and
development facility is located at 1134 Dentistry Pharmacy Building, University
of Alberta, Edmonton, Alberta T6G 2N8. The Company's U.S. office is located at
Suite 125, 303 Wyman Street, Waltham, Massachusetts 02154. All of the above
premises are leased by the Company.
The Company's Canadian leases are for a term of 5 years and the U.S. lease is
for a three-year term. The lease costs for the Company will be approximately
$260,000 in 1998 and will increase to approximately $298,000 per annum in 1999
and thereafter.
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ITEM 3 - LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings material to it and insofar
as it is aware, no such proceedings are contemplated.
ITEM 4 - CONTROL OF REGISTRANT
Insofar as it is aware, the Company is not directly or indirectly owned or
controlled by another corporation(s) or by the provincial government of Alberta,
the federal government of Canada or any foreign government.
To the knowledge of the Company, no person of record owns beneficially, directly
or indirectly, more than 10% of the issued and outstanding Common Shares of the
Company as at March 31, 1998, except for Dr. Noujaim as set out below:
<TABLE>
<CAPTION>
IDENTITY OF PERSON OR
TITLE OF CLASS GROUP AMOUNT OWNED PERCENT OF CLASS
- --------------------------- --------------------------- ---------------------------- ----------------
<S> <C> <C> <C>
Common Shares Dr. Antoine A. Noujaim 3,856,200 Common Shares(1) 23.4%(1)
Common Shares Directors and Officers 6,160,575 Common Shares(2) 37.3%(2)
</TABLE>
Notes:
(1) This number does not include 375,000 Common Shares issuable upon the
exercise of a stock option held by Dr. Noujaim which is exercisable at
a price of $1.80 per share until July 26, 2001.
(2) This number does not include:
(a) 540,000 Common Shares issuable upon the exercise of stock options
held by the directors and officers of the Company, 465,000 of
which are issuable at a price of $1.80 per share until July 26,
2001, 20,000 of which are issuable at a price of $5.90 per share
until February 11, 2002, 10,000 of which are issuable at a price
of $5.90 per share until February 20, 2002, 15,000 of which are
issuable at a price of $3.68 per share until July 8, 2002, and
30,000 of which are issuable at a price of $2.96 per share until
January 22, 2003;
(b) 207,875 Common Shares issuable under the exercise of warrants
which are exercisable at a price of $3.00 per share until July
17, 1998; and
(c) 825,000 Common Shares issuable upon the exercise of stock
options, which were granted on March 4, 1998, subject to
regulatory approval, and are exercisable at a price of $3.00 per
share until March 4, 2003.
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ITEM 5 - NATURE OF TRADING MARKET
The Common Shares of the Company were listed and posted for trading on The
Alberta Stock Exchange on June 7, 1994 and on The Toronto Stock Exchange on
December 20, 1996. The Company's shares were subsequently voluntarily delisted
on the Alberta Stock Exchange on February 2, 1997.
All trading prior to December 12, 1995 occurred while the Company was still a
junior capital pool company pursuant to Alberta Securities Commission Policy
4.11 (the "Policy"). The Common Shares of the Company were suspended from
trading from December 12, 1995 to August 1, 1996 for failure by the Company to
complete a "Major Transaction" pursuant to the Policy. Trading in the Company's
common shares was reinstated on August 2, 1996 after the Company completed
certain transactions which collectively constituted its Major Transaction under
the Policy.
The following table sets forth the reported high and low sale prices of the
Common Shares of the Company as reported by The Alberta Stock Exchange from
January 1, 1996 to February 2, 1997 and by The Toronto Stock Exchange from
December 20, 1996 to March 31, 1998. Price range and trading volume information
set out below has been adjusted to reflect the four-for-one consolidation of the
Company's Common Shares that occurred in November 1996.
PERIOD PRICE RANGE
------ -----------
HIGH LOW
---- ---
1st Quarter, 1996 Trading Suspended
2nd Quarter, 1996 Trading Suspended
3rd Quarter, 1996 $7.00 $5.00
4th Quarter, 1996 8.08 6.00
1st Quarter, 1997 7.00 5.00
2nd Quarter, 1997 5.50 3.40
3rd Quarter, 1997 4.30 2.50
4th Quarter, 1997 3.80 2.10
1st Quarter, 1998 3.25 2.25
The closing price of the Common Shares of the Company on The Toronto Stock
Exchange on March 31, 1998 was $2.26 per Common Share.
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The Company's shares are not listed on any exchange in the United States. At
March 31, 1998, approximately 2% of the outstanding shares of the Company are
held of record by five persons resident in the United States.
ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS
There are no laws, governmental decrees or regulations in Canada that restrict
the export or import of capital or which affect the remittance of dividends,
interest or other payments to non-resident holders of the Company's Shares,
other than specific embargoes enacted by regulation sunder the United Nations
Act (Canada) and withholding tax requirements. See "Item 7. Taxation."
There are no limitations under the laws of Canada or the Province of Alberta, or
in the Articles of Incorporation of the Company, with respect to the right of
non-resident or foreign owners to hold or vote the Shares of the Company other
than those imposed by the Investment Canada Act (Canada) (the "Investment Act")
and the Completion Act (Canada).
The following summarizes the principal features of the Investment Act for
non-residents other than WTO investors (defined in section 14.1(b) of the
Investment Act as being individual investors who are nationals of, or have the
right of permanent residence in, a Member of the World Trade Organization and
corporate investors who are either WTO investor-controlled in fact, or
two-thirds of whose board of directors is comprised of any combination of
Canadians and WTO investors) who propose to acquire Common Shares of the
Company.
The Investment Act prohibits implementation of a reviewable investment by an
individual, government (or agency thereof), company, partnership, trust or joint
venture which is not a "Canadian" (as defined in the Investment Act (a
"non-Canadian")) or a WTO investor, unless after review the minister responsible
for the Investment Act (the "Minister") is satisfied that the investment is
likely to be of net benefit to Canada. A reviewable investment under the
Investment act is characterized as an investment for control of a Canadian
business with assets valued at $5,000,000 or more, or in the case where the
total assets of the Canadian business are less than half of the total assets
acquired, the Canadian business assets are $50,000,000 or more. Notwithstanding
the above limits, an investment can become a reviewable investment if an order
for review is made by the Federal cabinet on the grounds that the investment is
related to Canada's cultural heritage or national identity.
An investment in Common Shares of the Company by a WTO investor would only be
reviewable under the Investment Act if it was an investment to acquire control
of the Company and the value of the assets of the Company equals or exceeds an
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amount determined annually by the Minister pursuant to a formula specified in
the Investment Act ($172,000,000 for 1997).
A non-Canadian, whether a WTO investor or otherwise, would acquire control of
the Company for the purposes of the Investment Act if he acquired a majority of
the Common Shares of the Company. The acquisition of less than a majority, but
one-third or more, of the Common Shares of the Company would be presumed to be
an acquisition of control of the Company unless it could be established that the
Company was not controlled in fact by the acquirer through the ownership of
Common Shares.
Certain transactions in relation to Common Shares in the Company would be exempt
from the Investment Act, including:
(a) the acquisition of Shares by a person in the ordinary course of
the person's business as a trader or dealer in securities;
(b) the acquisition of control of the Company in connection with the
realization of a security interest granted for a loan or other
financial assistance and not for any purpose related to the
provisions of the Investment Act; and
(c) the acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact
of the Company, through the ownership of voting interests,
remains unchanged.
The Investment Act further contains provisions which require notification to be
given under the Investment Act in the circumstances where a "non-Canadian" (as
defined in the Investment Act) acquires control of the Company notwithstanding
that such investment is not a reviewable investment as described above.
In addition to the foregoing, certain transactions involving the Company and its
security holders may be subject to notification and review under the Competition
Act (Canada). In general, in order for a transaction to be notifiable, the
parties together with their affiliates (defined to include parent, subsidiary
and sister companies) must have assets in Canada or gross revenues from sales
in, from or into Canada that exceed $400,000,000. Assuming this threshold is
met, additional thresholds based on the type of transaction must be met before
notification is required. If a transaction is ultimately notifiable, the parties
must provide the Director of Investigation and Research (the "Director") with
detailed information about the transaction and the parties, and observe a
waiting period prior to closing the transaction. Without the
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Director's pre-clearance of the transaction before the expiration of the waiting
period, the transaction will not be permitted to be completed.
ITEM 7 - TAXATION
The following is a general summary only and should not be considered as income
tax advice or relied upon for tax planning purposes.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain Canadian federal income tax
considerations generally applicable to a holder of the Company's Shares who is
not a resident of Canada for the purposes of the Income Tax Act (Canada) (the
"Act"). The discussion does not address all potentially relevant federal income
tax matters and it does not address consequences peculiar to persons subject to
special provisions of federal income tax law.
The summary is based on the current provisions of the Act and the regulations
thereunder and the company's understanding of the current administrative
practices published by, and Press announcements released by Revenue Canada,
Customs, excise and Taxation and the Department of Finance. This summary takes
into account proposals to amend the Act announced prior to the date hereof
(although no assurances can be given that such changes will be enacted in the
form presented or at all), but does not otherwise take into account or
anticipate any other changes in law, whether by judicial, governmental or
legislative action or decision nor does it take into account any provincial,
territorial, local or foreign tax considerations. Accordingly, holders and
prospective holders of the Company's Shares should consult their own tax
advisors about the federal, provincial, territorial, local and foreign tax
consequences of purchasing, owning and disposing of such shares.
The Act provides in subsection 212(2) that dividends and other distributions
which are deemed to be dividends and which are paid or credited or are deemed to
be paid or credited by a Canadian resident company to a non-resident of Canada
shall be subject to non-resident withholding tax equal to 25 percent of the
gross amount of the dividend or deemed dividend.
Subsections 2(3) and 115(1) of the Act provide that a non-resident person is
subject to tax in Canada at the rates generally applicable to residents of
Canada on any "taxable capital gain" arising on the disposition of the shares of
a company which are listed on a prescribed stock exchange if such non-resident,
together with persons with whom he does not deal at arm's length, owned 25
percent or more of the issued shares of any class of the capital stock of the
Company at any time in the five years immediately preceding the date of
disposition of the shares. Subsections 2(3) and 115(1) also provide that a
non-resident person is subject to tax in Canada on taxable
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<PAGE> 48
capital gains arising on the disposition of shares that constitute capital
property used in carrying on a business in Canada. The taxable portion of a
capital gain is equal to three-quarters of the amount by which the proceeds of
disposition of such shares, net of any reasonable costs associated with the
disposition of such shares, exceeds the adjusted cost base to the holder of the
shares.
Provisions in the Act relating to dividend and deemed dividend payments and
gains realized by non-residents of Canada who are residents of the United States
are subject to the Canada-United States Income Tax Convention (1980), as amended
(the "1980 Convention").
Article X of the 1980 Convention provides that for 1997 and subsequent taxation
years pursuant to the Third Protocol to the 1980 Convention the rate of Canadian
non-resident withholding tax on dividends paid to a U.S. company that
beneficially owns at least 10% of the voting stock of the Company shall not
exceed 5% of the dividends. Otherwise, and except in the case of dividends
received by a resident of the United States who carries on business in Canada
through a Canadian permanent establishment and the shares in respect of which
the dividends are paid are effectively connected with that permanent
establishment, the rate of non-resident withholding shall not exceed 15 percent
of the dividend. Where the dividends are received by a United States person
carrying on business in Canada through a Canadian permanent establishment and
the shares in respect of which the dividends are paid are effectively connected
with that permanent establishment the dividends are generally subject to
Canadian tax as business profits, generally without limitation under the 1980
Convention.
Article XIII of the 1980 Convention provides that gains realized by a United
States resident on the disposition of shares of a Canadian company may not
generally be taxed in Canada unless the value of those shares is derived
principally from real property situated in Canada or the shares form part of the
business property of a permanent establishment which the United States
shareholder has or had in Canada within the 12 month period preceding the date
of disposition. Canada also retains the right to tax gains on property owned at
the time of departure from Canada if it is sold by a person who was resident in
Canada for 120 months in any 20 consecutive years preceding the sale and who was
a resident in Canada at any time in the 10 years preceding sale.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain possible United States federal
income tax consequences, under current law, generally applicable to a U.S.
Holder (as defined below) of the company's Shares. This discussion does not
address all potentially relevant federal income tax matters and it does not
address consequences peculiar to persons subject to special provisions of
federal income tax law, such as
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<PAGE> 49
those described below as excluded from the definition of a U.S. Holder. In
addition, this discussion does not cover any state, local or foreign tax
consequences. (See "Taxation - Certain Canadian Federal Income Tax Consequences"
above.)
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
This discussion does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time. This discussion is for
general information only and it is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of the
Company's Shares and no opinion or representation with respect to the United
States federal income tax consequences to any such holder or prospective holder
is made. Accordingly, holders and prospective holders of the Company's Shares
should consult their own tax advisors about the federal, state, local, and
foreign tax consequences of purchasing, owning and disposing of the Company's
Shares.
HOLDERS
As used herein, a "U.S. Holder" means a holder of the Company's Shares who is a
citizen or individual resident of the United States, a Company or partnership
created or organized in or under the laws of the United States or of any
political subdivision thereof or a trust whose income is taxable in the United
States irrespective of source. This summary does not address the tax
consequences to, and U.S. Holder does not include persons subject to specific
provisions of federal income tax law, such as tax-exempt organizations,
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, nonresident
alien individuals, persons or entities that have a "functional currency" other
than the U.S. dollar, shareholders who hold the Company's Shares as part of a
straddle, hedging or a conversion transaction, and shareholders who acquired
their stock through the exercise of employee stock options or otherwise as
compensation for services. This summary is limited to U.S. Holders who own
Company's Shares as capital assets. This summary does not address the
consequences to a person or entity holding an interest in a shareholder or the
consequences to a person of the ownership, exercise or disposition of any
options, warrants or other rights to acquire Company's Shares.
DISTRIBUTIONS ON THE COMPANY'S SHARES
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to Company's Shares are required to include in gross income for
United
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<PAGE> 50
States federal income tax purposes the gross amount of such distributions equal
to the U.S. dollar value of such dividends on the date of receipt (based on the
exchange rate on such date) to the extent that the Company has current or
accumulated earnings and profits, without reduction for any Canadian income tax
withheld from such distributions. Such Canadian tax withheld may be credited,
subject to certain limitations, against the U.S. Holder's United States federal
income tax liability or, alternatively, may be deducted in computing the U.S.
Holder's United States federal taxable income by those who itemize deductions.
(See more detailed discussion at "Foreign Tax Credit" below.) To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the U.S. Holder's
adjusted basis in the Company's Shares and thereafter as gain from the sale or
exchange of the Company's Shares. Preferential tax rates for long-term capital
gains are applicable to a U.S. Holder which is an individual, estate or trust.
There are currently no preferential tax rates for long-term capital gains for a
U.S. Holder which is a Company.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Generally any gain or loss recognized upon a subsequent sale or
other disposition of the foreign currency, including the exchange for U.S.
dollars, will be ordinary income or loss. However, an individual whose realized
gain does not exceed $200 will not recognize that gain, to the extent that there
are no expenses associated with the transaction that meet the requirement for
deductibility as a trade or business expense (other than travel expenses in
connection with a business trip) or as an expense for the production of income.
Dividends paid on the Company's Shares will not generally be eligible for the
dividends received deduction provided to Companies receiving dividends from
certain United States Companies. A U.S. Holder which is a Company may, under
certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from the Company (unless the Company
qualifies as a "foreign personal holding company" or a "passive foreign
investment company," as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations which
are beyond the scope of this discussion.
Under current temporary Treasury Regulations, dividends paid on the Company's
Shares, if any, generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax, however, dividends
paid, and the proceeds of a sale of Company's Shares, in the U.S. through a U.S.
or U.S. related paying agent (including, a broker) will be subject to U.S.
information reporting requirements and may also be subject to the 31% U.S.
backup withholding tax, unless the paying agent is furnished with a duly
completed and signed Form W-9. Any
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amounts withheld under the U.S. backup withholding tax rules will be allowed as
a refund or a credit against the U.S. Holder's U.S. federal income tax
liability, provided the required information is furnished to the IRS. It should
be noted, however, that under proposed Treasury Regulations which are not yet
effective and which are only to be applied prospectively, any dividends paid on
the Company's Shares will be subject to information reporting and potential 31%
U.S. backup withholding tax. Whether and when such proposed regulations will
become effective cannot be determined at this time.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of the Company's Shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by (or withheld from) the U.S. Holder during that year. There
are significant and complex limitations which apply to the credit, among which
is the general limitation that the credit cannot exceed the proportionate share
of the U.S. Holder's United States income tax liability that the U.S. Holder's
foreign source income bears to his or its worldwide taxable income. In the
determination of the application of this limitation, the various items of income
and deduction must be classified into foreign and domestic sources. Complex
rules govern this classification process. In addition, this limitation is
calculated separately with respect to specific classes of income such as
"passive income," "high withholding tax interest," "financial services income,"
"shipping income," and certain other classifications of income. Dividends
distributed by the Company will generally constitute "passive income" or, in the
case of certain U.S. Holders, "financial services income" for these purposes.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific, and holders and prospective holders
of the Company's Shares should consult their own tax advisors regarding their
individual circumstances.
DISPOSITION OF COMPANY'S SHARES
A U.S. Holder will recognize gain or loss upon the sale of the Company's Shares
equal to the difference, if any, between (i) the amount of cash plus the fair
market value of any property received, and (ii) the shareholder's tax basis in
the Company's Shares. This gain or loss will be capital gain or loss if the
Company's Shares are a capital asset in the hands of the U.S. Holder, which will
be a short-term or long-term capital gain or loss depending upon the holding
period of the U.S. Holder. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses
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are subject to significant limitations. For U.S. Holders which are individuals,
any unused portion of such net capital loss may be carried over to be used in
later tax years until such net capital loss is thereby exhausted. For U.S.
Holders that are Companies (other than Companies subject to Subchapter S of the
Code), an unused net capital loss may be carried back three years from the loss
year and carried forward five years from the loss year to be offset against
capital gains until such net capital loss is thereby exhausted.
OTHER CONSIDERATIONS
In the following circumstances, the above sections of this discussion may not
describe the United States federal income tax consequences resulting from the
holding and disposition of the Company's Shares:
FOREIGN PERSONAL HOLDING COMPANY
If at any time during a taxable year more than 50% of the total combined voting
power or the total value of the Company's outstanding shares is owned, directly
or indirectly, by five or fewer individuals who are citizens or residents of the
United States and 60% or more of the Company's gross income for such year was
derived from certain passive sources (e.g., from dividends received from its
subsidiaries), the Company may be treated as a "foreign personal holding
company." In that event, U.S. Holders that hold the Company's Shares would be
required to include in gross income for such year their allocable portions of
such passive income to the extent the Company does not actually distribute such
income.
FOREIGN INVESTMENT COMPANY
If 50% or more of the combined voting power or total value of the Company's
outstanding shares are held, directly or indirectly, by citizens or residents of
the United States, United States domestic partnerships or Companies, or estates
or trusts other than foreign estates or trusts (as defined by the Code Section
7701(a)(31)), and the Company is found to be engaged primarily in the business
of investing, reinvesting, or trading in securities, commodities, or any
interest therein, it is possible that the Company may be treated as a "foreign
investment company" as defined in Section 1246 of the Code, causing all or part
of any gain realized by a U.S. Holder selling or exchanging Company's Shares to
be treated as ordinary income rather than capital gain.
PASSIVE FOREIGN INVESTMENT COMPANY
As a foreign Company with U.S. Holders, the Company could potentially be treated
as a passive foreign investment company ("PFIC"), as defined in Section 1296 of
the Code, depending upon the percentage of the Company's income which is
passive, or
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the percentage of the Company's assets which is producing passive income. U.S.
Holders owning Common Shares of a PFIC are subject to an additional tax and to
an interest charge based on the value of deferral of tax for the period during
which the Common Shares of the PFIC are owned, in addition to treatment of gain
realized on the disposition of Common Shares of the PFIC as ordinary income
rather than capital gain. However, if the U.S. Holder makes a timely election to
treat a PFIC as a qualified electing fund ("QEF") with respect to such
shareholder's interest therein, the above-described rules generally will not
apply. Instead, the electing U.S. Holder would include annually in his gross
income his pro rata share of the PFIC's ordinary earnings and net capital gain
regardless of whether such income or gain was actually distributed. A U.S.
Holder of a QEF can, however, elect to defer the payment of United States
federal income tax on such income inclusions. In addition, taxpayers owning
(actually or constructively) marketable stock in a PFIC will be permitted to
elect to mark that stock to market annually, rather than be subject to the
excess-distribution regime of Section 1291. Amounts included in or deducted from
income under this regime (and actual gains and losses realized upon disposition,
subject to certain limitations) will be treated as ordinary. The provision will
apply to taxable years of U.S. persons beginning after 1997, and taxable years
of foreign corporations ending with or within such taxable years of U.S.
persons. Special rules apply to U.S. Holders who own their interests in a PFIC
through intermediate entities or persons.
The Company believes that it was not a PFIC for its fiscal years ended December
31, 1996 and 1997. The Company may have been a PFIC in earlier fiscal years and
may be a PFIC in its current and subsequent fiscal years. If in its current or
in a subsequent year the Company concludes that it is a PFIC, it intends to make
information available to enable a U.S. Holder to make a QEF election in that
year. There can be no assurance that the Company's determination concerning the
PFIC status will not be challenged by the IRS, or that it will be able to
satisfy record keeping requirements which will be imposed on QEF's.
CONTROLLED FOREIGN COMPANY
If more than 50% of the voting power of all classes of stock or the total value
of the stock of the Company is owned, directly or indirectly, by citizens or
residents of the United States, United States domestic partnerships and
companies or estates or trusts other than foreign estates or trusts, each of
whom own 10% or more of the total combined voting power of all classes of stock
of the Company ("United States shareholder"), the Company could be treated as a
"controlled foreign company" under Subpart F of the Code. This classification
would effect many complex results one of which is the inclusion of certain
income of a CFC which is subject to current U.S. tax. The United States
generally taxes the U.S. 10-percent shareholders of a CFC currently on their pro
rata shares of the subpart F income of the CFC. In effect, the Code treats those
U.S. shareholders as having received a current distribution out of the CFC's
subpart F income. Such shareholders also are subject to current U.S. tax on
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their pro rata shares of the CFC's earnings invested in U.S. property. The
foreign tax credit may reduce the U.S. tax on these amounts. In addition, under
Section 1248 of the Code, gain from the sale or exchange of stock by a holder of
Common Shares of the Company who is or was a United States shareholder at any
time during the five year period ending with the sale or exchange is treated as
ordinary dividend income to the extent of earnings and profits of the Company
attributable to the stock sold or exchanged. Note that the overlap between the
PFIC and CFC rules generally will be eliminated for 10-percent U.S. shareholders
of a CFC. Where a foreign corporation is both a PFIC and a CFC, the provision
generally will treat the foreign corporation as a non-PFIC with respect to
10-percent U.S. shareholders of the CFC. The change generally will be effective
for taxable years of U.S. persons beginning after 1997, and for taxable years of
foreign corporations ending with or within such taxable years of U.S. persons.
Special rules are provided for stock held by PFIC shareholders subject to the
rules applicable to non-qualified funds. Because of the complexity of Subpart F,
and because it is not clear that Subpart F would apply to the holders of Common
Shares of the Company, a more detailed review of these rules is outside of the
scope of this discussion.
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ITEM 8 - SELECTED FINANCIAL DATA
The following table presents selected financial data for the Company which are
for the periods indicated below and which are derived from the Financial
Statements of the Company and are prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). These principles, as
applied to the Company, do not differ materially from those accounting
principles and requirements of the Securities and Exchange Commission in the
United States ("U.S. GAAP") except as disclosed in Note 8 to the Company's
Financial Statements. All figures are in Canadian funds. The selected financial
data should be read in conjunction with the Company's Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Conditions
and Results of Operations. To date, the Company has not generated sufficient
cash flow from operations to fund ongoing operational requirements and cash
commitments. The Company has financed its operations principally through the
sale of its equity securities and its ability to continue operations is
dependent on the ability of the Registrant to obtain additional financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 1, 1995
FOR THE YEAR FOR THE YEAR TO
ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, 1995
1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,619,836 $ 88,257 $ 23,520
Net loss for the period (Canadian $ (4,677,637) $ (2,172,059) $ (225,899)
GAAP)
Net loss for the period (U.S. GAAP) $ (4,840,637) $ (2,742,059) $ (225,899)
Loss per common share (Canadian $ (0.29) $ (0.24) $ (0.03)
GAAP)
Loss for common share (U.S. GAAP) $ (0.30) $ (0.30) $ (0.03)
Cash dividends declared per common $ - $ - $ -
share
</TABLE>
AS AT AS AT
DECEMBER 31, DECEMBER 31,
1997 1996
----------------------------------------------
Total assets - Canadian GAAP $ 27,299,744 $ 28,016,056
Total assets - US GAAP $ 27,299,744 $ 28,016,056
Deferred lease credit $ 555,676 $ -
(Canadian and US GAAP)
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The Company has paid no dividends on its shares since incorporation and does not
anticipate doing so for the foreseeable future. The declaration of dividends on
the Common Shares of the Company is within the discretion of the Company's board
of directors and will depend upon, among other factors, earnings, capital
requirements, and the operating and financial condition of the Company.
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ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis explains trends in the Company's financial
condition and results of operation for the years ending December 31, 1997 and
1996 and the one month period ended December 31, 1995. This discussion and
analysis of the results of operations and financial condition of the Company
should be read in conjunction with the financial statements and the related
notes included elsewhere in this Annual Report. The financial statements have
been prepared by management in accordance with accounting principles generally
accepted in Canada which conform to accounting principles in the United States,
except as described in Note 8 to the financial statements.
OVERVIEW
The Company's business is the research, development and commercialization of
biopharmaceutical products for the therapy of cancer. Substantially all of the
Company's products are subject to regulation by the HPB in Canada, the FDA in
the United States, the EMEA in Europe and similar agencies in other countries.
None of the Company's products have been approved to date. The Company has not
been profitable since its inception and expects to continue to incur substantial
losses in continuing the research, development and clinical trials of its
products. The Company does not expect to generate significant revenues until
such time as its cancer therapeutic products are approved by the various
regulatory agencies and become commercially viable.
ACQUISITION AND AMALGAMATION
Effective July 17, 1996, the Company (formerly known as Allrich Energy Group
Inc.) acquired all of the outstanding shares of AltaRex Inc. for a purchase
price satisfied through the issue of 7.5 million Common Shares of the Company.
These Common Shares gave AltaRex Inc.'s shareholders a controlling interest in
the Company and effectively constituted a reverse take-over of the Company by
the shareholders of AltaRex Inc. The Company, at the time of acquisition, was an
inactive public company. The purpose of the acquisition was to realize funds
associated with a private placement and special warrant offering that were
completed at that time and to provide future access to public market funding.
Effective May 31, 1997, the Company amalgamated with AltaRex Inc. and continued
under the name of AltaRex Corp.
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RESULTS OF OPERATIONS
The Company, through its predecessor AltaRex Inc., commenced operations on
December 1, 1995 and completed its first full year of operations on December 31,
1996.
As of December 31, 1997, the Company had incurred cumulative losses of $7.1
million. This related to a loss of $4.7 million for the year ending December 31,
1997, a loss of $2.2 million for the year ending December 31, 1996 and a loss of
$200,000 for the one month ended December 31, 1995. These losses are expected to
materially increase as the Company pursues its development, clinical trials and
commercialization programs prior to receiving regulatory approvals and the
successful introduction of the Company's products.
REVENUES
The Company's total revenues of $1.6 million for the year ending December 31,
1997 were derived primarily from interest income of $900,000 and research
contract revenue of $700,000. This compares to total revenues of $88,000 for the
year ending December 31, 1996, that consisted primarily of interest income, and
$24,000 for the one month ending December 31, 1995. Interest income for the year
ending December 31, 1997 increased $835,000 over the comparable period in 1996
due to the higher average cash and short-term investment balance that resulted
from funds raised in the public share offering in late 1996. Research contract
revenues for the year ending December 31, 1997 increased $665,000 over the
comparable period in 1996 as a result of two government funded research
contracts entered into in 1997.
Sales revenues from research contracts and for research product materials are
not expected to increase significantly in the near future. However, the Company
continues to explore and evaluate opportunities for the generation of revenues
that can contribute to the funding of the Company's core research and
development programs.
EXPENSES
The Company's research and development expenses for the year ending December 31,
1997 were $4.7 million compared to $1.7 million for the year ending December 31,
1996 and $200,000 for the one month ending December 31, 1995. The 175% increase
in research and development expenses for the year ending December 31, 1997 over
the comparable period in 1996 reflects the cost of supporting a higher level of
activity related to research, product development and clinical trials which
resulted in higher personnel, supply and clinical trial expenses. This includes
the commencement of a Phase II/IIb clinical trial of the Company's lead product
OvaRex(TM) in Canada, as well as the preparation for a Phase IIb clinical trial
in the United States. The higher
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<PAGE> 59
research and development expenses for the year ending December 31, 1996 compared
to those for the one month ending December 31, 1995 is a result of the Company
commencing significant research and development activities in 1996.
The Company's administrative and general corporate expenses for the year ending
December 31, 1997 were $1.6 million compared to $500,00 for the year ending
December 31, 1996 and $42,000 for the one month ending December 31, 1995. The
189% increase in administrative and general corporate expenses for the year
ending December 31, 1997 over the comparable period in 1996 is a direct result
of supporting the growth of the Company's research and development programs,
initiating a program for business development and establishing operations as a
publicly-traded company. The higher administrative and general corporate
expenses for the year ending December 31, 1996 compared to those for the one
month ending December 31, 1995 is a result of the Company commencing significant
operations in 1996.
The Company anticipates that the level of spending in research and development
will increase significantly in the near future as the Company's OvaRex(TM) and
other programs enter into further research and development activities, including
but not limited to cell culture production, clinical trials and seeking
regulatory approvals. This will also result in the increase of administrative
and general corporate expenses to support the growth in the Company's research,
clinical and business development programs. The actual levels of research and
development, administrative and general corporate expenditures are dependent on
the cash resources available to the Company as discussed below.
FOREIGN CURRENCY EXPOSURE
To date, exposure to foreign currency fluctuations has
not had a material effect on the Company's operations. Upon the opening of a
U.S. office in Waltham, Massachusetts, the establishment of significant
operations there and the conducting of clinical trials in the United States, the
Company's risk of foreign currency exposure will increase as a potentially
significant portion of its transactions will be denominated in U.S. dollars. The
Company does not currently engage in hedging or other activities to control the
risk of foreign currency exposure, but will continue to monitor the situation
and may do so in the future as conditions warrant.
IMPACT OF THE YEAR 2000 ISSUE
Based on an assessment of the Company's internal computer programs, the Company
has determined that its major computer systems are compatible with dates beyond
December 31, 1999. To date, the Company has reviewed all significant suppliers
and third parties to determine the extent to which the Company is exposed to
possible computer system failure. The Company believes that the expected cost
and availability of resources to recover information not properly processed
after December 31, 1999 would not result in a material effect on the Company's
results of
50
<PAGE> 60
operation. However, there can be no assurance that the Company will not be
required to incur unanticipated expense in this regard.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no contributing cash flows from operations. The
Company has very limited self-financing capabilities and, as a result, relies on
external sources of financing such as the issue of equity or debt securities,
the exercise of warrants and the receipt of royalties and milestone payments in
the context of strategic alliances and partnerships to fund its research and
development programs.
Investing activities for the years ending December 31, 1997 and 1996 and the one
month ending December 31, 1995 were $1.5 million, $76,000 and $600,000,
respectively. The major investments made in the year ending December 31, 1997
include $700,000 in leasehold improvements for its newly renovated office and
research facilities, $400,000 in office and computer equipment, and $400,000 in
scientific equipment. The leasehold improvements purchased in the year ended
December 31, 1997 were financed primarily by an inducement from the landlord.
The major investment made for the one month ending December 31, 1995 was the
purchase of $500,000 of scientific equipment.
During 1997, the Company issued 1.2 million Common Shares upon the exercise of
share purchase warrants and options for an aggregate exercise price of $2.9
million. During 1996, the Company issued 2.3 million Common Shares in relation
to its private placement and special warrant offerings that resulted in combined
gross proceeds of $4.1 million before deducting combined expenses of $600,000.
These funds were raised to supply funding for the Company's ongoing research and
development programs, and to provide working capital. In addition, the Company
issued 4.1 million Common Shares from a public share offering in late 1996 for
gross proceeds of $27.7 million before deducting expenses of $2.6 million. These
funds were raised by the Company to supply funding for OvaRex(TM) clinical trial
and development program, for other development and clinical programs, and for
administrative and general corporate expenditures.
As of December 31, 1997, the Company's cash and short-term investments balance
was $25.0 million, which consists of highly liquid government and commercial
instruments with maturities not exceeding one year, compared with $27.2 million
on December 31, 1996. The change in the cash and short-term investments balance
is primarily the result of proceeds of $2.9 million received from the exercise
of warrants and options in 1997, offset by $4.0 million in cash used in
operations and the purchase of $1.5 million in capital assets (which includes
the leasehold improvements financed primarily by a $620,000 inducement from the
landlord). The Company anticipates that its cash requirements for fiscal 1998
will exceed that of 1997 as the
51
<PAGE> 61
Company continues to accelerate its research, development and clinical trial
programs. The Company's cash requirements are also expected to increase in 1998
in connection with the establishment of the Company's U.S. subsidiary, the
opening of the offices of the subsidiary, the staffing of the U.S. office and
the additional operations to be conducted in the United States. The Company
believes, however, that, based upon its current operating plan, its cash and
other working capital position will be sufficient to meet its cash requirements
for its planned expenditures and working capital requirements into the second
half of 1999.
There can be no assurance that the Company's actual expenditures for the above
period will not exceed its planned expenditures. If the actual expenditures
exceed the planned expenditures, the Company may be required to reduce or
eliminate research and development expenditures on certain products. If the
actual expenditures exceed the Company's planned expenditures, the Company will
consider contract fees, collaborative research and development arrangements, and
additional public or private financing (including the issuance of additional
equity securities). If such alternatives are not available, the Company
anticipates it will concentrate its resources on completing the clinical trials
of OvaRex(TM).
For the Company's future capital requirements, the Company will consider
contract fees, collaborative research and development arrangements with
governmental or industrial partners, and additional public or private financing
(including the issuance of additional equity securities) to fund all or a part
of a particular program in the future. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms. If adequate funds are not available, the Company may have to
reduce substantially or eliminate expenditures for research and development,
testing, production and marketing of its proposed products, or obtain funds
through arrangements with corporate partners that require the Company to
relinquish rights to certain of its technologies or products. There can be no
assurance that the Company will be able to raise additional capital if its
capital resources are exhausted. The ability of the Company to arrange such
financing in the future will depend in part upon the prevailing capital market
conditions as well as the business performance of the Company.
As the Company does not have general earnings from its operations and does not
currently have an existing credit facility, the Company's long-term liquidity
depends on its ability to access the capital markets or to enter into
collaborative agreements. The ability of the Company to access the capital
markets or to enlist new collaborative venture partners is substantially
determined by the success or failure of its research and development programs
and regulatory approval of its products. The Company does not know of any other
trends, demands, commitments, events or uncertainties that will result in, or
that are reasonably likely to result in, the Company's liquidity either
materially increasing or decreasing at present or in the foreseeable future.
52
<PAGE> 62
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
PRESENT OCCUPATION AND
POSITION DURING THE LAST
NAME AND MUNICIPALITY POSITION FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dr. Antoine A. Noujaim(2) Chairman of the Board Present and Chief Executive Officer
Edmonton, Alberta February from November, 1995 to 22,
1998; President of Biomira Research
Inc., a division of Biomira Inc. (A
biopharmaceutical company), from
1994 to 1995; Senior Vice-President
of the Immunoconjugate Division of
Biomira Inc. from 1989 to 1994;
director of Biomira Inc. from 1985
to 1995.
Richard E. Bagley President, Chief Executive President, Chief Executive Officer
Weston, Massachusetts Officer and Director and Director since February 23,
1998. Chairman and Chief Executive
Officer of Proscript Inc. from
September, 1995 to February, 1998.
President and Chief Executive
Officer of Immulogic Pharmaceutical
Corporation from 1990 to 1994.
Dr. Ragupathy Madiyalakan Vice-President, Business Vice-President of Research and
Edmonton, Alberta Operations Development since January, 1996.
Acting Director of Immunochemistry
for the Immunoconjugate Division of
Biomira Inc. from January, 1994
until December, 1995. Director,
Biotechnology Research & Development
of Biomira Research Inc. from
October, 1992 to January, 1994.
Blaine Schamber Secretary of the Company Secretary of the Company and
Edmonton, Alberta and Vice-President, Finance Vice-President, Finance and
and CFO Corporate Development since
January, 1996. Finance Manager of
Biomira Inc. from 1991 to 1995.
</TABLE>
53
<PAGE> 63
<TABLE>
<CAPTION>
<S> <C> <C>
Dr. Thomas R. Sykes Vice-President, Product Vice-President Operations since
Edmonton, Alberta Development, Quality January, 1996. Director of
Control and Manufacturing Pharmaceutical Research and
Development of Biomira Research
Inc. from 1993 to 1995. Director of
Product Development for the
Immunoconjugate Division of
Biomira Inc. from 1990 to 1993.
William R. McMahan(2) Director since January 1, President of Oxbow Capital
Calgary, Alberta 1996 Corporation (a merchant banking
company) from October, 1993 to
present. A Director of International
Marketing, Oxbow Resources Limited
(a merchant banking company) from
January, 1992 to present. Consultant
for Safety Boss Limited (an oilfield
service company) from August 1, 1991
to December 31, 1991.
Jean-Claude Gonneau(1) Director since January 29, Director of the Company. Principal
London, United Kingdom 1997 with Donaldson, Lufkin & Jenrette
(an investment dealer).
Georges Hibon(2) Director since January 19, Former Chairman and CEO of
New York, New York 1998 Pasteur Merieux Connaught North
America.
Monique Begin(1) Director since May 14, 1998 Professor emerita, University of
Ottawa, Ontario Ottawa. Dean, Faculty of Health
Sciences, University of Ottawa from
1990 to 1997. Minister of National
Health and Welfare for the
Government of Canada from March 1980
to September 1984.
Jim A. Wright(1) Director since May 14, 1998 Chairman of the Board, President
Winnipeg, Manitoba and Chief Scientific Officer of
GeneSense Technologies Inc. since
1997. Terry Fox Senior Research
Scientist of the National Cancer
Institute of Canada since 1990.
Associate Director, Manitoba
Institute of Cell Biology since 1989.
</TABLE>
NOTES:
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
54
<PAGE> 64
ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS
COMPENSATION OF EXECUTIVE OFFICERS
During the fiscal year ended December 31, 1997, the Company had four executive
officers. The aggregate cash compensation paid by the Company to such executive
officers, as a group, from January 1, 1997 to December 31, 1997 was $535,000.
The following table details compensation information for the period from January
1, 1997 to December 31, 1997, and the period from July 17, 1996 to December 31,
1996.
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSA-
TION
---------------------------------------------------------------
AWARDS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON
OTHER SHARES
ANNUAL UNDER ALL OTHER
COMPEN- OPTIONS COMPEN-
NAME AND SALARY BONUS SATION GRANTED SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Antoine A. Noujaim(1) 1997 220,000 Nil Nil Nil 6,312
President and Chief 1996 78,602 Nil Nil 375,000 Nil
Executive Officer
Dr. R. Madiyalakan 1997 105,000 5,771 Nil 10,000 3,997
Vice-President, Research
and Development
Dr. Thomas Sykes 1997 105,000 Nil Nil 10,000 4,269
Vice-President,
Operations
Blaine Schamber 1997 105,000 Nil Nil 10,000 4,206
Vice-President, Finance
and Corporate
Development
====================================================================================================================================
</TABLE>
Notes:
(1) Dr. Noujaim, Dr. Madiyalakan, Dr. Sykes and Mr. Schamber became officers of
the Company on July 17, 1996 upon the acquisition by the Company of all of
the issued shares of AltaRex Inc.
(2) Compensation under the column "All Other Compensation" is with respect to
employee benefits such as health care, life insurance and a group
retirement saving plan.
The Summary Compensation Table above and the Stock Option Grant and the
Stock Option Exercise Tables below present information concerning the fiscal
year ended December 31, 1997. Mr. Bagley, who joined the Company as President
and
55
<PAGE> 65
Chief Executive Officer in February 1998, currently receives a salary of
$350,000 per year. In March 1998, options to purchase 825,000 Common Shares were
granted to Mr. Bagley, subject to regulatory approval, at an exercise price of
$3.00.
STOCK OPTIONS
The following table details information with respect to the grant of options by
the Company to Dr. Noujaim, Dr. Madiyalakan, Dr. Sykes and Mr. Schamber during
the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
====================================================================================================================================
OPTION GRANTS
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF
COMMON % OF TOTAL COMMON SHARES
SHARES OPTIONS UNDERLYING
UNDER GRANTED TO EXERCISE OR OPTIONS ON THE
OPTIONS EMPLOYEES BASE PRICE DATE OF GRANT
GRANTED IN FINANCIAL ($/COMMON ($/COMMON
NAME # YEAR SHARE) SHARE) EXPIRATION DATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dr. Antoine Nil Nil Nil Nil N/A
Noujaim,President and
Chief Executive Officer
Dr. R. Madiyalakan 10,000(1) 12% $5.90 $5.90 February 11, 2002
Vice-President,
Research and Development
Dr. Thomas Sykes 10,000(1) 12% $5.90 $5.40 February 20, 2002
Vice-President,
Operations
Blaine Schamber 10,000(1) 12% $5.90 $5.90 February 11, 2002
Vice President, Finance
and Corporate
Development
====================================================================================================================================
</TABLE>
Notes:
(1) These options vest subject to the achievement of certain goals and
milestones.
The following table details information with respect to all options held by
Dr. Noujaim, Dr. Madiyalakan, Dr. Sykes and Mr. Schamber and outstanding on
December 31, 1997. None of these executive officers exercised options in 1997.
56
<PAGE> 66
================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR-END
Exercisable/ ($)Exercisable/
NAME Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Dr. Antoine A.
Noujaim 125,000/250,000 $150,000/$300,000 (1)
- --------------------------------------------------------------------------------
Dr. R. Madiyalakan 8,333/26,667 $10,000/$20,000(1)
- --------------------------------------------------------------------------------
Dr. Thomas Sykes 8,333/26,667 $10,000/$20,000(1)
- --------------------------------------------------------------------------------
Blaine Schamber
8,333/26,667 $10,000/$20,000(1)
================================================================================
NOTE:
(1) This amount was determined by multiplying the number of Common Shares
covered by such options (the "Shares") by the closing price of the Common
Shares on The Toronto Stock Exchange on December 31, 1997 ($3.00 per share)
and subtracting therefrom the product of the number of Shares and the
exercise price thereof ($1.80 per share or $5.90 respectively). See "Stock
Options."
COMPENSATION OF DIRECTORS
In 1997, each director, with the exception of Dr. Antoine A. Noujaim, received a
fee of $5,000 per annum and $500 per meeting. Further, all directors are
eligible to receive stock options and are entitled to receive their reasonable
out-of pocket disbursements incurred on the business of the Company. In the
aggregate, a total of $20,500 in fees was paid to the members of the Board of
Directors during the period from January 1, 1997 to December 31, 1997. One
director, Dr. Lowell T. Harmison, received remuneration as a consultant to the
Company for which he received remuneration in the amount of $192,944 for the
period of January 1, 1997 to November 4, 1997, on which date Dr. Harmison
resigned as a director of the Company.
57
<PAGE> 67
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANT OR SUBSIDIARIES
STOCK OPTIONS
As at March 31, 1998, there were outstanding options to purchase a total of
1,098,833 Common Shares under the Company's stock option plan as follows:
- --------------------------------------------------------------------------------
NUMBER EXERCISE
OF PRICE PER
GROUP SHARES DATE OF GRANT SHARE EXPIRY DATE
- --------------------------------------------------------------------------------
Directors 15,000 July 26, 1996 $1.80 July 26, 2001
(excluding 15,000 July 8, 1997 $3.68 July 8, 2002
executive 30,000 January 22, 1998 $2.96 January 22, 2003
officers)(1)
- --------------------------------------------------------------------------------
Executive 450,000 July 26, 1996 $1.80 July 26, 2001
Officers (1) 20,000 February 11, 1997 $5.90 February 11, 2002
10,000 February 20, 1997 $5.90 February 20, 2002
- --------------------------------------------------------------------------------
Employees 123,500 July 26, 1996 $1.80 July 26, 2001
13,333 February 4, 1997 $6.00 February 4, 2002
34,000 July 8, 1997 $3.68 July 8, 2002
3,000 November 7, 1997 $3.30 November 7, 2002
10,000 February 1, 1998 $2.84 February 1, 2003
- --------------------------------------------------------------------------------
Consultants 155,000 July 26, 1996 $1.80 July 17, 1998
110,000 July 8, 1997 $3.68 July 8, 2002
10,000 November 7, 1997 $3.30 November 7, 2002
100,000 January 26, 1998 $2.75 January 26, 2003
- --------------------------------------------------------------------------------
Note:
(1) Excludes options to purchase 825,000 Common Shares granted, subject to
regulatory approval, at an exercise price of $3.00 to Richard E. Bagley,
the President and Chief Executive Officer of the Company, in March 1998.
There is also currently issued and outstanding:
(a) warrants to purchase a total of 1,138,650 Common Shares exercisable
until July 17, 1998 at an exercise price of $3.00 per share;
(b) an agent's option to purchase 72,500 units at a price of $1.80 per
unit which is exercisable until July 17, 1998. Each unit consists of
one Common Share and one warrant to purchase a further Common Share.
Each such warrant is exercisable until July 17, 1998 at a price of
$3.00; and
(c) warrants to purchase a total of 41,667 Common Shares exercisable until
February 28, 2000 at a price of $12 per share.
58
<PAGE> 68
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
There are no material interests, direct or indirect, of directors, senior
officers or shareholders of the Company who beneficially own, directly or
indirectly, more than 10% of the outstanding Common Shares or any known
associate or affiliates of such persons, in any transaction since July 1996 or
in any proposed transaction which has materially affected or will materially
affect the Company, except for the following:
1. On July 17, 1996 the Company acquired all of the issued and outstanding
shares of AltaRex Inc. for a purchase price satisfied by the issuance by
the Company of 7,525,000 Common Shares (the "AltaRex Acquisition"). As a
result, the former shareholders of AltaRex Inc. became the controlling
shareholders of the Company and AltaRex Inc. became a wholly owned
subsidiary of the Company. Each of the officers and directors of the
Company (other than Mr. Gonneau) directly or indirectly owned shares of
AltaRex Inc. prior to the AltaRex Acquisition and therefore received Common
Shares of the Company pursuant to the AltaRex Acquisition. The numbers of
Common Shares of the Company referred to in this paragraph have been
adjusted to reflect a consolidation of the Common Shares of the Company
which was effected in November of 1996.
2. AltaRex Inc. entered into loan agreements with several individuals between
January 1, 1996 and July 17, 1996 pursuant to which it borrowed $1,100,000
(the "Bridge Financing"). Dr. Antoine A. Noujaim and 668355 Alberta Ltd.
loaned $100,000 and $400,000 respectively to AltaRex Inc. pursuant to the
bridge financing. The loans from Dr. Noujaim and 668355 Alberta Ltd. were
unsecured loans bearing interest at 12% per annum. The bridge financing was
repaid in full by AltaRex Inc. on July 30, 1996. William R. McMahan, a
director of the Company, is a director of 668355 Alberta Ltd. and a trust
established for the benefit of his family is a major shareholder of 668355
Alberta Ltd.
PART III
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES
Not Applicable
59
<PAGE> 69
PART IV
ITEM 17 - FINANCIAL STATEMENTS
See the Financial Statements listed in Item 19 hereof and attached hereto as
EXHIBIT A, which are filed and incorporated herein as part of this Annual
Report.
These financial statements were prepared in accordance with generally accepted
accounting principles in Canada and are expressed in Canadian dollars. Such
financial statements have been reconciled to United States generally accepted
accounting principles. For a history of exchange rates in effect for Canadian
dollars as against U.S. dollars see page ii of this Annual Report.
ITEM 18 - FINANCIAL STATEMENTS
Not Applicable
ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
Report of Ernst & Young, Independent Chartered Accountants
Consolidated balance sheets as at December 31, 1997 and December 31, 1996
Consolidated statements of loss and accumulated deficit for the years ended
December 31, 1997 and 1996, and for the period December 1, 1995 to December 31,
1995
Consolidated statements of cash flows for the year ended December 31, 1997 and
1996, and for the period December 1, 1995 to December 31, 1995
Notes to the Consolidated Financial Statements
EXHIBITS
The list of Exhibits filed as part of this Annual Report on Form 20-F are set
forth on the Exhibit Index immediately preceding such Exhibits, and is
incorporated herein by this reference.
60
<PAGE> 70
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALTAREX CORP.
Per: /s/ Richard E. Bagley
-------------------------------------
Richard E. Bagley
President and Chief Executive Officer
DATED this 20th day of May, 1998.
61
<PAGE> 71
EXHIBIT A
---------
FINANCIAL STATEMENTS
ALTAREX CORP.
DECEMBER 31, 1997
A-1
<PAGE> 72
AUDITORS' REPORT
To the Shareholders of
ALTAREX CORP.
We have audited the balance sheets of AltaRex Corp. as at December 31, 1997 and
1996 and the statements of loss and accumulated deficit, and the statements of
cash flows for the years ended December 31, 1997 and 1996, and for the one month
period ended December 31, 1995. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1997 and 1996
and the results of its operations and the changes in its financial position for
the years ended December 31, 1997 and 1996, and for the one month period ended
December 31, 1995 in accordance with accounting principles generally accepted in
Canada.
Edmonton, Canada /s/ Ernst & Young
February 16, 1998 ---------------------
Chartered Accountants
A-2
<PAGE> 73
ALTAREX CORP.
BALANCE SHEETS
As at December 31
1997 1996
(in Canadian dollars) $ $
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments 25,002,106 27,215,949
Accounts receivable 192,299 72,323
Investment tax credit receivable [note 6] 247,734 247,734
Prepaid expenses 274,837 4,840
- --------------------------------------------------------------------------------
25,716,976 27,540,846
CAPITAL ASSETS [NOTE 3] 1,582,768 475,210
- --------------------------------------------------------------------------------
27,299,744 28,016,056
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 1,035,299 489,923
- --------------------------------------------------------------------------------
1,035,299 489,923
DEFERRED LEASE CREDIT [NOTE 4] 555,676
- --------------------------------------------------------------------------------
1,590,975 489,923
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES [note 7]
SHAREHOLDERS' EQUITY
Share capital [note 5] 32,784,364 29,924,091
Accumulated deficit during the development stage (7,075,595) (2,397,958)
- --------------------------------------------------------------------------------
25,708,769 27,526,133
- --------------------------------------------------------------------------------
27,299,744 28,016,056
- --------------------------------------------------------------------------------
See accompanying notes
On behalf of the Board:
Director Director
A-3
<PAGE> 74
ALTAREX CORP.
STATEMENTS OF LOSS AND
ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED ENDED DEC.1, 1995
DECEMBER 31, - DEC. 31, - DEC. 31,
-----------------
1997 1996 1995 1997
(in Canadian dollars) $ $ $ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Research contracts [note 7] 680,000 15,000 695,000
Sale of research materials 39,760 8,589 23,520 71,869
Interest income 900,076 64,668 964,744
- -------------------------------------------------------------------------------------------------
1,619,836 88,257 23,520 1,731,613
- -------------------------------------------------------------------------------------------------
EXPENSES
Research and development 4,733,918 1,720,031 207,801 6,661,750
General and administrative 1,563,555 540,285 41,618 2,145,458
- --------------------------------------------------------------------------------------------------
6,297,473 2,260,316 249,419 8,807,208
- --------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR (4,677,637) (2,172,059) (225,899) (7,075,595)
Accumulated deficit, beginning of year (2,397,958) (225,899)
- --------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, END OF YEAR (7,075,595) (2,397,958) (225,899) (7,075,595)
- --------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE [NOTE 2] ($0.29) ($0.24) ($0.03)
- --------------------------------------------------------------------------------------------------
Weighted-average number of
common shares 15,894,880 9,067,374 7,525,000
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
A-4
<PAGE> 75
ALTAREX CORP.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED ONE MONTH
DECEMBER 31, ENDED DEC. 1, 1995
----------------- -DEC. 31, -DEC. 31,
1997 1996 1995 1997
(IN CANADIAN DOLLARS) $ $ $ $
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES
Net loss (4,677,637) (2,172,059) (225,899) (7,075,595)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 366,268 127,816 9,717 503,801
Amortization of deferred lease credit (64,324) (64,324)
Interest expense satisfied through
issuance of common shares 12,066 12,066
Net changes in non-cash working capital
balances 374,431 (163,546) 109,544 320,429
- -----------------------------------------------------------------------------------------------------------
(4,001,262) (2,195,723) (106,638) (6,303,623)
- -----------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES
Purchase of capital assets (1,473,826) (45,473) (567,270) (2,086,569)
Acquisition of altarex corp (30,250) (30,250)
- -----------------------------------------------------------------------------------------------------------
(1,473,826) (75,723) (567,270) (2,116,819)
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issue of common shares, net [note 5] 2,860,273 25,391,601 1,000,000 29,251,874
Issue of Private Placement Units, net [note 5] 2,340,674 2,340,674
Issue of Special Warrants, net [note 5] 1,210,000 1,210,000
Share subscription receivable 293,963 (293,963)
Deferred lease credit 620,000 620,000
Net changes in non-cash financing balances (219,028) 219,028
- -----------------------------------------------------------------------------------------------------------
3,261,245 29,455,266 706,037 33,422,548
- -----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (2,213,843) 27,183,820 32,129 25,002,106
Cash and short-term investments,
Beginning of year 27,215,949 32,129
- -----------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS,
END OF YEAR 25,002,106 27,215,949 32,129 25,002,106
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
A-5
<PAGE> 76
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The Company, incorporated under the Alberta Business Corporations Act, is a
biotechnology company that is engaged in the research and development of
biopharmaceutical products for the therapy of cancer. The Company is in its
development stage.
The Company's ability to complete its research and development program and
commercialize its technology is dependent on the Company continuing to arrange
the necessary financing and the receipt of regulatory approvals to use its
products in the therapy of cancer.
ACQUISITION OF ALTAREX INC.
Effective July 17, 1996, AltaRex Corp. (formerly known as Allrich Energy Group
Inc.) acquired 100% of the issued and outstanding common shares of AltaRex Inc.
by issuing a total of 7,525,000 of AltaRex Corp.'s common shares. At the date of
acquisition, AltaRex Corp. was a non-operating company with net monetary
liabilities totalling $30,250, which amount approximated their net fair value.
AltaRex Inc. was incorporated on October 31, 1995 and commenced active
operations on December 1, 1995. By this transaction, sufficient common shares of
AltaRex Corp. were issued so that a controlling interest (approximately 74%) of
the corporate group passed to the former shareholders of AltaRex Inc.
Accordingly, for accounting purposes, AltaRex Inc. was treated as the purchaser,
and the acquisition was accounted for as a reverse take-over. The legal parent
company, AltaRex Corp., is deemed to be a continuation of AltaRex Inc., and
accordingly, these financial statements are a continuation of the financial
statements of AltaRex Inc., the legal subsidiary, and not the legal parent. In
these financial statements, the comparative figures presented are those of
AltaRex Inc. In making the acquisition, AltaRex Inc. acquired net liabilities of
approximately $30,250 which amount has been charged to share issue costs. The
acquisition has been accounted for using the purchase method with the cost of
the purchase being a nominal $1.
AMALGAMATION OF ALTAREX CORP. AND ALTAREX INC.
Effective May 31, 1997, AltaRex Corp. amalgamated with its wholly-owned
subsidiary, AltaRex Inc., to continue operations as AltaRex Corp. For accounting
purposes, the amalgamation has been accounted for based on the carrying amounts
of the assets and liabilities of AltaRex Corp. and AltaRex Inc. prior to the
amalgamation.
A-6
<PAGE> 77
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared by management in accordance with
accounting principles generally accepted in Canada, which do not differ
materially from those established in the United States, except as disclosed in
Note 8. The preparation of financial statements in conformity with such
principles requires management to make estimates and assumptions that affect the
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Research material sales are recognized as materials are delivered.
Revenue from research contracts, which includes government funding of research
projects, is recognized as the services are performed based on costs incurred
or, for those contracts that provide for milestone payments, as milestones are
achieved. Amounts received under research contracts are not refundable if the
research effort is unsuccessful. Amounts received in advance of services to be
performed are recorded as unearned revenue.
CASH AND SHORT-TERM INVESTMENTS
The Company invests its surplus cash in highly liquid government and commercial
instruments with maturities not exceeding one year. The carrying cost of
short-term investments approximates their fair value. The short-term investments
held at December 31, 1997 have maturity periods averaging 5 months and average
interest rates approximating 3.9%.
CAPITAL ASSETS
Capital assets are stated at cost net of investment tax credits. Depreciation
and amortization is provided at rates which are designed to allocate the cost of
the assets, on a straight-line basis, over their estimated useful lives as
follows:
Scientific equipment 5 years
Computer software and equipment 3 years
Office equipment 5 years
Leasehold improvements 5 years, term of lease
A-7
<PAGE> 78
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed in the period incurred. Development costs are
expensed in the period incurred unless the Company believes a development
project meets generally accepted accounting principles for deferral and
amortization. No development costs have been deferred to date.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities in foreign currencies are translated into
Canadian dollars at the rate of exchange at the period end; transactions during
the period are translated at the rate of exchange in effect at the date of the
transaction. Gains and losses arising from these translation adjustments are
included in income.
INVESTMENT TAX CREDITS
The Company is permitted to offset federal income taxes payable with unapplied
investment tax credits which are based on the cost of carrying on qualifying
research and development activities and the cost of qualifying new equipment
(see note 6).
Refundable investment tax credits received by the Company relating to the
acquisition of assets are deducted from the cost of the related asset.
Refundable investment tax credits received by the Company relating to current
expenses are included in the determination of net income as a reduction of
research and development costs.
INCOME TAXES
Income taxes have been provided on a deferred tax allocation basis whereby the
provision for income taxes is determined on the basis of income and expenses
included on the statement of income rather than the related amounts reported in
the income tax returns of the Company. Deferred income taxes relate primarily to
differences between the amount of depreciation and amortization recorded for
accounting purposes and capital cost allowance claimed for income tax purposes.
A-8
<PAGE> 79
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
In accordance with accounting principles applicable to reverse take-overs, the
loss per share figures are calculated on the following basis:
o The number of shares outstanding from the beginning of the fiscal
period to the date of the reverse take-over on July 17, 1996 and for
the comparative periods, are deemed to be the number of shares issued
by AltaRex Corp. to AltaRex Inc.
o The number of shares outstanding from the date of the reverse take-over
to the end of each of the fiscal periods are deemed to be the actual
number of shares of AltaRex Corp. outstanding in each period.
The loss per share figure is calculated on the weighted-average number of shares
outstanding based on the numbers determined above, including shares held in
escrow.
3. CAPITAL ASSETS
1997 1996
--------------------- -------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
$ $ $ $
- --------------------------------------------------------------------------------
Scientific equipment 954,565 306,144 553,151 118,926
Computer software
and equipment 174,658 74,763 48,583 16,237
Office equipment 244,346 50,820 11,009 2,370
Leasehold improvements 713,000 72,074
- --------------------------------------------------------------------------------
2,086,569 503,801 612,743 137,533
- --------------------------------------------------------------------------------
NET BOOK VALUE 1,582,768 475,210
- --------------------------------------------------------------------------------
A-9
<PAGE> 80
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
4. DEFERRED LEASE CREDIT
The deferred lease credit relates to leasehold improvements provided to the
Company by the landlord for its leased office and research facilities. The
deferred lease credit is being amortized over the term of the lease agreements
which is five years (see note 7). For the year ended December 31, 1997, rent
expense was reduced by $64,324.
5. SHARE CAPITAL
AUTHORIZED
The authorized share capital of the Company consists of an unlimited number of
common shares and an unlimited number of preferred shares.
The preferred shares may be issued in one or more series and the directors are
authorized to fix the number of shares in each series and to determine the
designation, rights, privileges, restrictions and conditions attached to the
shares of each series.
A-10
<PAGE> 81
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
5. SHARE CAPITAL (CONTINUED)
ISSUED AND OUTSTANDING COMMON SHARES
Summarized below are the Company's issued and outstanding common shares:
<TABLE>
<CAPTION>
AMOUNT
PERTAINING TO
ALTAREX INC.
NUMBER OF SHARE
ALTAREX CORP. CAPITAL
SHARES $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 1, 1995 1,169,330
Issue of shares 25,000
Initial capitalization of Company 1,000,000
- --------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,194,330 1,000,000
Private placement of shares 175,200
Issue of shares in settlement of interest payable 12,066
Shares issued in private placement of unit sales 1,497,500 2,310,424
Shares issued to acquire AltaRex Inc. 7,525,000 1
Issue of shares for cash from exercise of Special Warrants 797,500 1,210,000
Shares issued for cash in public offering 4,100,000 25,036,466
Issue of shares resulting from exercise of stock options 116,933 76,014
Issue of shares resulting from exercise of Warrants 43,300 103,920
- -------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 15,274,563 29,924,091
Issue of shares resulting from exercise of stock options 95,000 170,931
Issue of shares resulting from exercise of Warrants 1,113,050 2,689,342
- -------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 16,482,613 32,784,364
- -------------------------------------------------------------------------------------------------
</TABLE>
Effective November 28, 1996, the shareholders approved a consolidation of the
Company's common shares, on the basis of one new common share for every four
existing common shares. These financial statements reflect the share
consolidation for all periods presented.
On July 17, 1996, the Company issued 1,497,500 common shares on the exercise of
Private Placement Units ("Units"). The Units were issued on July 17, 1996 for
gross proceeds of $2,695,500 inclusive of Units issued for $175,000 in
commission charges. The Units consisted of 1,497,500 common shares and common
share purchase warrants ("Warrants") that are exercisable into 1,497,500 common
shares.
A-11
<PAGE> 82
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
5. SHARE CAPITAL (CONTINUED)
On November 18, 1996 a total of 797,500 common shares were issued on the
exercise of Special Warrants. The Special Warrants were issued on July 17, 1996
for gross proceeds of $1,435,500 inclusive of Special Warrants issued for
$130,500 in commission charges. The Special Warrants consisted of 797,500 common
shares and Warrants that are exercisable into 797,500 common shares. As
additional consideration for the services rendered by the Underwriter related to
the Special Warrant issuance, a compensation option was granted. The
compensation option consists of Optioned units that when exercised will result
in the issuance of 72,500 common shares and Warrants that are exercisable into
72,500 common shares.
On December 20, 1996, the Company issued 4,100,000 common shares in a public
offering for gross proceeds of $27,675,000. The net proceeds of $25,036,466,
after related issue expenses of $2,638,534, were provided to the Company.
A total of 5,260,757 (December 31, 1996 - 7,834,330) common shares of the
Company are being held in escrow for regulatory purposes and released on the
following basis:
o An amount of 4,831,204 (December 31, 1996 - 7,190,000) common shares
will be released from escrow on a basis pro rata to each shareholder,
of one common share for each $1.20 of gross research and development
costs incurred by the Company to a maximum in any one year of 2,396,666
common shares.
o An additional 429,553 (December 31, 1996 - 644,330) common shares will
be released from escrow on a basis pro rata to each shareholder of one
half of the escrowed shares on each of the second and third
anniversaries of the July 17, 1996 reverse take-over.
WARRANTS AND STOCK OPTION PLAN
In 1997, the Company amended its stock option plan for directors, officers,
employees and consultants. Pursuant to the amended plan, a total of 1,544,206
common shares of the Company are reserved for issue of stock options, of which
565,373 are available for grant at December 31, 1997. At December 31, 1997,
there were 683,833 (December 31, 1996 - 608,500) stock options outstanding for
directors, officers and employees and 295,000 (December 31, 1996 - 250,000)
options for consultants.
A-12
<PAGE> 83
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
5. SHARE CAPITAL (CONTINUED)
The following warrants and stock options to purchase common shares are
outstanding:
<TABLE>
<CAPTION>
SHARES ISSUABLE ON
EXERCISE OF
-------------------------
EXERCISE PRICE YEAR OF
STOCK OPTIONS WARRANTS PER SHARE EXPIRY
$
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 1 AND
DECEMBER 31, 1995 Nil Nil
Granted 72,500 1.80 1998
Granted 2,367,500 2.40-3.00 1998
Granted 250,000 1.80 1998
Granted 608,500 1.80 2001
Exercised (43,300) 2.40-3.00 1998
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 858,500 2,396,700
Granted 41,667 12.00 2000
Granted 43,333 5.90-6.00 2002
Granted 161,500 3.68 2002
Granted 13,000 3.30 2002
Exercised (95,000) 1.80 1998
Exercised (1,113,050) 2.40-3.00 1998
Cancelled (2,500) 3.68 2002
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 978,833 1,325,317
- ------------------------------------------------------------------------------------------------------
</TABLE>
6. INCOME TAX
During the period January 1 to July 17, 1996 approximately $300,000 of
investment tax credits were claimed, $250,000 of which is refundable and $50,000
of which can be used as credits to reduce federal income taxes. Prior to the
reverse take-over acquisition, AltaRex Inc. was eligible for refundable
scientific research and experimental development investment tax credits.
Subsequent to the reverse take-over acquisition, the Company is eligible for
such credits but at a reduced rate which may only be applied against federal
taxes payable. The accumulated non-refundable investment tax credits as at
December 31, 1997 approximate $1,360,000 (December 31, 1996 - $236,000).
A-13
<PAGE> 84
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
6. INCOME TAX (CONTINUED)
As at December 31, 1997, the Company has scientific research and experimental
development expenditures for tax purposes of approximately $5,208,000 (December
31, 1996 - $1,400,000) which may be carried forward indefinitely and utilized by
reducing income for income tax purposes.
As at December 31, 1997, the Company has approximately $2,900,000 (December 31,
1996 - $1,800,000) of non-capital losses available to be applied to taxable
income of future years. These losses expire between 2002 and 2004.
No recognition has been given in these financial statements to the potential tax
benefits which may result from these carry forward amounts.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office and research facilities for a term of five years and
is committed to annual minimum payments under the lease agreements of
approximately $144,000 per annum.
On December 1, 1995, in an arm's-length transaction, AltaRex Inc. acquired a
fifteen year exclusive world-wide right and license to a certain antibody, its
cell bank, related data, records and proprietary rights (the "Technology") which
will be used for the therapy of cancer, for a non-refundable cash fee of
$150,000 from a company which, at the time of the acquisition, had a director
who was also a director of the Company. This license fee has been charged to
research and development expenses. In addition, certain equipment was purchased
for cash of $514,000, an amount approximating its fair value. The Company also
agreed to pay royalties associated with revenues from the Technology. The
Technology agreement requires that the Company use its best efforts to
commercialize the Technology and to commit to spending certain minimum amounts
to develop the Technology. Should these obligations not be met, the Company's
right under the Technology agreement ceases to be exclusive.
The Company is party to a jointly-funded research contract with the
Canada-Israel Industrial Research and Development Foundation. Total funding of
$300,000 is available over a three year term commencing in 1997. Cumulative
funding for services performed to December 31, 1997 of $100,000 is recorded as
revenue. This funding is conditionally repayable, on commercial success, at a
rate of 2.5% of gross sales of the resulting products.
A-14
<PAGE> 85
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is party to an agreement with the Alberta Heritage Foundation for
Medical Research to jointly fund clinical trials, with the Company controlling,
through ownership or licensing, all of the technology. Total funding available
of $500,000 has been recorded as revenue for services performed to December 31,
1997. The Company is required to repay this funding and a royalty equivalent to
the amount actually received, from the commercial success of the resulting
products and technology, at a rate of the lesser of 5% of gross sales or
$100,000 per annum. In addition, the Company granted Warrants in connection with
this agreement which entitle the holder to obtain 41,667 common shares (see note
5).
The Company has contracted certain research projects to a third party consultant
for a three year period ending March 2000. Fees will be paid to the consultant
to a maximum of $300,000 per annum.
8. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada (Canadian GAAP) which conform in all
material respects to those accounting principles in the United States (U.S.
GAAP), except as follows:
(a) Cash and short-term investments
Under Canadian GAAP, for purposes of the statement of cash flows, cash and
cash equivalents include all short-term investments. Under U.S. GAAP, only
those short-term investments with original maturities of less than three
months would be included in cash and cash equivalents. Short-term
investments with maturities greater than three months amounted to $9,036,000
as at December 31, 1997 (Nil as at December 31, 1996). Accordingly, under
U.S. GAAP, cash used in investing activities for the year ended December 31,
1997 would increase by $9,036,000 and cash and cash equivalents would
decrease by $9,036,000 (Nil as at December 31, 1996).
A-15
<PAGE> 86
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
8. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES (CONTINUED)
(b) Accounting for income taxes
For reconciliation purposes to U.S. GAAP, the Company is required to account
for income taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. In
addition, under U.S. GAAP, a deferred tax asset, net of a valuation
allowance, is recorded to recognize the future benefit of loss carryforwards
when the realization of the benefit is determined to be more likely than
not. Under Canadian GAAP, the benefits of such losses may only be recorded
in the period incurred if realization is virtually certain. At December 31,
1997, the Company has determined that the deferred tax asset net of a
valuation allowance of $5,005,000 (December 31, 1996 - $2,600,000) is nil
(Nil at December 31, 1996).
(c) Accounting for stock-based compensation
For U.S. GAAP purposes, the Company accounts for stock-based compensation to
employees in accordance with Accounting Principles Board (APB) Opinion No.
25. No compensation expense has been recognized on the Company's stock
options and warrants granted, since the exercise price of these instruments
equal the fair value of the Company's stock as at the date of the grant.
Under U.S. GAAP, stock-based compensation to non-employees is recorded at
the fair value of the options and warrants granted. This compensation
expense would be amortized over the appropriate vesting periods. As at
December 31, 1997, the unamortized compensation benefit that the Company
would record under U.S. GAAP as additional compensation expense in future
periods amounts to $181,000 (December 31, 1996 - $80,000).
A-16
<PAGE> 87
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
8. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES (CONTINUED)
(d) Share subscription receivable
In January, 1996, the Company received the proceeds related to the $293,963
share subscription receivable outstanding at December 31, 1995. Under U.S.
GAAP, subscriptions receivable are presented as a deduction from common
shares subscribed. Accordingly, total assets and shareholders' equity as at
December 31, 1995 would decrease by $293,963.
(e) Reverse take-over costs
Under Canadian GAAP, costs incurred in connection with the Company's reverse
take-over are presented as a charge against shareholder's equity. For U.S.
GAAP purposes, these costs totalling $495,000 must be charged to expense.
Accordingly, net loss for the year ended December 31, 1996 and share capital
as at December 31, 1996 will increase by $495,000.
(f) Recent pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130 "Comprehensive Income" ('SFAS 130'), and No.
131 "Disclosures about Segments of an Enterprise and Related Information"
('SFAS 131'). SFAS 130 and SFAS 131 are effective for the Company's December
31, 1998 year end. The Company has not determined the impact, if any, of
SFAS 130 and SFAS 131 on its financial statements.
A-17
<PAGE> 88
ALTAREX CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(In Canadian dollars)
8. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES (CONTINUED)
The following table reconciles the net loss as reported on the statements of
loss to the net loss that would have been reported had the financial statements
been prepared in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED ENDED DEC. 1, 1995
DECEMBER 31, - DEC. 31, - DEC. 31,
----------------------
1997 1996 1995 1997
$ $ $ $
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss per Canadian GAAP 4,677,637 2,172,059 225,899 7,075,595
Adjustment for stock-based compensation 163,000 75,000 238,000
Adjustments of reverse take-over costs 495,000 495,000
- --------------------------------------------------------------------------------------------------------------
Net loss per U.S. GAAP 4,840,637 2,742,059 225,899 7,808,595
- --------------------------------------------------------------------------------------------------------------
Basic and diluted net loss
per share, U.S. GAAP (0.30) (0.30) (0.03)
- --------------------------------------------------------------------------------------------------------------
Weighted-average number of
common shares 15,894,880 9,067,374 7,525,000
Weighted-average number
of common shares and
dilutive share equivalents 15,894,880 9,067,374 7,525,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes balance sheet items with material variations under U.S.
GAAP.
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
- --------------------------------------------------------------------------------
Share capital 33,517,364 30,494,091
Accumulated deficit 7,808,595 2,967,958
A-18
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
<S> <C>
1.1+ The Articles of the Company dated November 18, 1993
as amended by Articles of Amendment dated June 25, 1996 and
November 28, 1996.
1.2+ Articles of Amalgamation of the Company dated May
31, 1997 as amended by Articles of Amendment dated
June 27, 1997.
1.3+ The Bylaws of the Company dated March 1, 1995.
1.4+ Asset Purchase Agreement dated November 24, 1995
among AltaRex Inc., Biomira Research Inc. and Biomira
Inc.*
1.5+ The Share Purchase Agreement.
1.7+ Letter Agreement dated February 20, 1996 between
AltaRex Inc. and Merck Frosst Canada Inc.*
1.8+ Joint Research Collaboration Agreement dated February
21, 1996 between AltaRex Inc. and Resolution
Pharmaceuticals Inc.
1.9+ Joint Research and Licensing Agreement dated August
15, 1996 between the University of Alberta and AltaRex
Inc.*
1.10+ License Agreement dated November 24, 1995 between
Biomira Inc. and AltaRex Inc.*
1.11+ Assignment of Patent Agreement dated April 4, 1996
between Biomira Inc. and AltaRex Inc.
1.12+ Employment Contracts dated January 1, 1996, between
AltaRex Inc. and Dr. Antoine Noujaim, and
Employment Contracts dated January 1, 1997 between
AltaRex Corp. and each of Blaine J. Schamber, Dr. R.
Madiyalakan and Dr. Thomas R. Sykes.
1.13+ The Warrant Indenture.
1.14+ The Special Warrant Indenture.
1.15+ Assignment of Letter Agreement dated February 20,
1996 between AltaRex Inc. and Merck Frosst Canada
Inc. See "Business of AltaRex - Strategic Alliances and
License Agreement."
1.16+ Employment Contract dated January 1, 1997 between
AltaRex Corp. and Dr. R. Madiyalakan.
1.17 Employment Arrangement dated February 18, 1998 and amended
as of March 30, 1998 between AltaRex Corp.
and Richard E. Bagley.
1.18 Consent of Ernst & Young.
</TABLE>
<PAGE> 90
* Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Commission.
+ Incorporated by reference to Exhibits to the Company's Registration
Statement on Form 20-F.
<PAGE> 1
EXHIBIT 1.17
February 18, 1998
CONFIDENTIAL
Mr. Richard E. Bagley
121 Chestnut Street
Weston, Massachusetts 02193
Dear Dick:
We would like to formally offer you the position of President and C.E.O. of
AltaRex Corp. I know you share with me, the employees, the Board and our
investors the enthusiasm for the opportunity AltaRex represents to develop a
cancer company that can make a real difference.
As President and C.E.O. you would be responsible for all aspects of the Company
and its operations both in Edmonton and in the Boston area where you will
establish U.S. operations. You will report to the Board of Directors.
The terms of the offer are described below: (All amounts are in Canadian
dollars)
Base Salary: $250,000 per annum paid in 12 equal
monthly payments, subject to increase on an annual
basis
Sign-on Bonus: $100,000 paid on joining the company
Performance Bonuses: 1) A bonus of 30% will be paid on January 1, 1999 upon
the successful corporate efforts leading to an AltaRex
closing price of $4.00 (CDN) by Dec. 31, 1998 on the
TSE
2) An additional bonus of 10-20% will be paid in early
1999 as part of the Company's overall incentive program
if key objectives identified by the Board have been met
Stock: You will be offered options to purchase 825,000 shares
of common stock of the Company vesting 33 1/3% per year
over 3 years commencing on the date of employment. The
exercise price of these options will be set by the
Board of Directors at fair market value. This issuance
of share purchase options and their exercise is subject
to the availability of appropriate exemptions from
Canadian and U.S. regulations. The Company will use its
best efforts to obtain such approvals. These options
must be exercised within 90 days after any termination
of your employment unless termination is for cause.
Vesting of these options will be accelerated in full if
the Company is sold.
<PAGE> 2
Mr. Richard E. Bagley
February 18, 1998
Page 2
Group Benefits: You will receive comprehensive group health,
disability, accident and life insurance benefits in
line with the attached plan of Blue Cross of Canada or
such other comparable benefits and protection as the
Company is able to reasonably obtain from another plan
You will also be entitled to participate in and enjoy
the benefits of a retirement and pension plan, as .
instituted by the Company with Great West Life
Insurance for the benefit of its employees generally.
You will also be entitled to any other benefits as may
be deemed by the Board of Directors to be appropriate
to the position held by you as C.E.O. and to the
discharge of your duties.
You will be entitled to illness and vacation days
Leave: consistent with the standard policies for the Company's
employees and any such additional leave benefits which
the Board of Directors may deem appropriate.
Agreements: As a condition of employment, you will be required to
sign customary invention, non-disclosure and
non-compete agreements. You will also be required to
apply for an appropriate working permit in Canada.
Severance Compensation: If your employment is terminated by the Company without
cause in the first year, you will be entitled to
receive 24 months of continued base salary payments.
Should your employment be terminated without cause
after the first 12 months, you will be entitled to
receive 12 months of continued base salary payments
plus Bonus #1.
We would like to move forward as soon as possible and would like to suggest an
early start date of February 23, 1998.
I personally very much look forward to working with you.
Sincerely,
/s/ Antoine A. Noujaim
- ----------------------
Antoine A. Noujaim
Chairman of the Board
Agreed and Accepted by:
/s/ Richard E. Bagley
------------------------
Richard E. Bagley
<PAGE> 3
March 30, 1998
Ron McMahan
President
Oxbow Capital Inc.
29th Floor, 350 7th Avenue S.W.
Calgary, Alberta
T2P 3N9
Via Fax:
Dear Ron:
Re: Compensation Committee
Salary And Bonuses Of Richard E. Bagley
---------------------------------------
We are writing to request that Richard Bagley's salary structure be changed to
accommodate the following cash flow sequence for the Company.
We suggest that Richard's base salary be increased to $350,000 Canadian per
annum and that his $100,000 sign-on bonus and his 30% performance bonus payable
on January 1, 1999 as described in his offer letter be reduced to zero. This
would allow us to avoid the large up-front payments of the above two bonuses.
Accordingly, we would distribute salary payments to Richard evenly over the
course of the year of employment.
If you concur please sign the bottom of this letter and send it back to me. I
will have Richard sign this acknowledgement as well.
Sincerely,
/s/ Blaine Schamber
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Blaine Schamber
VP Finance & Corporate Development
cc: Richard E. Bagley
I agree with the above change to the salary and bonus structure for Richard E.
Bagley.
/s/ William R. McMahan /s/ Richard E. Bagley
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William R. McMahan Richard E. Bagley
Chairman,
Compensation Committee
<PAGE> 1
EXHIBIT 1.18
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the use of our report dated February 16, 1998 in the Annual Report
(Form 20-F) of AltaRex Corp., with respect to the financial statements of
AltaRex Corp. as at December 31, 1997 and 1996 and for the years ended December
31, 1997 and 1996 and the one month period ended December 31, 1995, filed with
the Securities and Exchange Commission.
Edmonton, Canada /s/ Ernst & Young
May 20, 1998 ---------------------------
Chartered Accountants
